Ferrari
Annual Report 2017

Plain-text annual report

Ferrari N.V.ANNUAL REPORT2017ANNUAL REPORT 2017Ferrari N.V.Official Seat:Amsterdam, The NetherlandsDutch Trade Registration Number:64060977 Administrative Offices:Via Abetone Inferiore 4I- 41053, Maranello (MO)ItalyFerrari N.V. ANNUAL REPORT 2017 Ferrari N.V. Official Seat: Amsterdam, The Netherlands Dutch Trade Registration Number: 64060977 Administrative Offices: Via Abetone Inferiore 4 I- 41053, Maranello (MO) Italy TABLE OF CONTENTS BOARD REPORT Board of Directors and Auditors Letter from the Chairman and Chief Executive Officer Certain Defined Terms and Note on Presentation Selected Financial and Other Data Creating Value for Our Shareholders Risk Factors Overview Industry Overview Overview of Our Business Operating Results Subsequent Events and 2018 Outlook Major Shareholders Corporate Governance Non-Financial Statement Risk, Risk Management and Control Systems Remuneration of Directors FINANCIAL STATEMENTS Consolidated Financial Statements and Notes at December 31, 2017 Consolidated Income Statement Consolidated Statement of Comprehensive Income Consolidated Statement of Financial Position Consolidated Statement of Cash Flows Consolidated Statement of Changes in Equity Notes to the Consolidated Financial Statements Company Financial Statements and Notes at December 31, 2017 Income Statement / Statement of Comprehensive Income Statement of Financial Position Statement of Cash Flows Statement of Changes in Equity Notes to the Company Financial Statements OTHER INFORMATION Other Information Independent Auditor’s Report 4 25 27 29 31 32 58 60 64 105 134 135 138 168 193 200 225 226 227 228 229 230 304 305 306 307 308 332 334 ANNUAL REPORT BOARD OF DIRECTORS AND AUDITORS Board of Directors Chairman and Chief Executive Officer Sergio Marchionne Directors John Elkann Piero Ferrari Delphine Arnault Louis C. Camilleri Giuseppina Capaldo Eddy Cue Sergio Duca Lapo Elkann Amedeo Felisa Maria Patrizia Grieco Adam Keswick Elena Zambon Independent Auditors Ernst & Young Accountants LLP FERRARI THE COMPANY “Rosso 70”, 70th Anniversary celebratory show 70th Anniversary celebrations worldwide 812 Superfast GTC4Lusso Ferrari Portofino GTC4Lusso T 4 488 GTB 488 Spider FERRARI THE COMPANY  “Rosso 70”, 70th Anniversary celebratory show 6 7 FERRARI THE COMPANY  70th Anniversary event in New York  The Silk Road tour to celebrate 70th Anniversary in China  The Ferrari Festival of Speed to celebrate the 70th Anniversary in Indonesia  70th Anniversary event in UK 8 9 FERRARI GT AND SPORTS CARS  812 Superfast 10 11 FERRARI GT AND SPORTS CARS  GTC4Lusso 12 13 FERRARI GT AND SPORTS CARS  Ferrari Portofino 14 15 FERRARI GT AND SPORTS CARS  GTC4Lusso T 16 17 FERRARI GT AND SPORTS CARS  488 GTB 18 19 FERRARI GT AND SPORTS CARS  488 Spider 20 21 FERRARI GT AND SPORTS CARS  FXX K Evo 22 23 LETTER FROM THE CHAIRMAN AND CHIEF EXECUTIVE OFFICER Dear Shareholders, 2017 marked Ferrari’s 70th Anniversary. We were surprised and delighted by the enthusiasm and the extraordinary turnout, with tens of thousands of clients and fans participating in the yearlong tour of celebrations all over the world. Events were held in over 60 different countries, providing a truly vivid and unforgettable display of the brand’s power. We had one more reason to celebrate, as 2017 was another year of new fantastic models and a very good, solid financial performance. We continued our growth, offering the widest range of products ever, without compromising on our fundamental principles of exclusivity and leading technological innovation. We launched three new cars, designed to meet the requirements of very diverse clients: the 812 Superfast, our most powerful and fastest road model ever, the Ferrari Portofino, which tops our V8 GT range, and the FXX K Evo, a track-only “laboratory car” unveiled at the Finali Mondiali in Mugello. We won the International Engine of the Year award, for the second consecutive year. This is an important acknowledgement of our leading-edge technology as it is one of the most sought-after plaudits in the car industry. The award was won by the 3.9-litre V8 power unit from the 488 family, for the new benchmarks it set in the turbo engine segment. We are, of course, just as determined to create equally impressive hybrid engines for the Ferraris of the future. In 2018 we will lay the groundwork of our future strategy, which will include hybrid technology as well as new models designed to meet the needs of a GT group of customers, which have not been fully addressed yet. In doing so, we will stay true to our strong DNA, ensuring that, whichever technology we use, we will always provide our customers with a unique driving experience, as Ferrari has always done. On the financial results side, Ferrari ended 2017 with a new record. Two years on from the listing on the U.S. and Italian stock markets, we can confirm that we have not only kept our promises but in certain instance exceeded our own plans. Our adjusted EBITDA grew to over a billion euro, with a margin of 30.3%, two years ahead of the IPO business plan. To mention just a couple of key figures, in 2017, we delivered 8,398 cars, an increase of 4.8% on the previous year, while revenues rose by 10% to 3.4 billion euro. We delivered equally important results on the sustainability front in 2017. Among our many social and environmental achievements and milestones, I am particularly proud of the work we did to help our staff develop their potential, as we truly believe our employees are a vital source of innovation. In 2017 we provided our workforce with over 35,500 hours of training. That investment was rewarded by the 7,600 suggestions our production staff submitted to help us improve our products and processes. Our commitment to sustainability includes naturally a constant reduction of CO2 emission for our models. Ferrari takes its role as an active member of society extremely seriously and decided to make a particular contribution to good causes in its 70th Anniversary year. In September, we donated an exclusive LaFerrari Aperta to Save the Children. Save the Children raised 8.3 million euro, which will be used to provide access to education for thousands of the most vulnerable children across all five continents. We sealed new licensing agreements in the course of the year, something we will continue to do with great caution, as we are conscious of the importance of protecting the brand’s value. We have just started our path and there is still a lot to do. 25 Last but not least, our sports activities: we had a season with some satisfaction, but also a few regrets. On the GT side, it proved an exceptionally rewarding year crowned by both Constructors’ and Drivers’ titles in the FIA World Endurance Championship. The Formula 1 World Championship taught us a big lesson, we were proud to return to the circuits as protagonists and with a single-seater well up to what seemed like an impossible challenge even as the first grand prix approached. Unfortunately, it still was not quite enough, but we are now more determined than ever to compete in the upcoming Championship - and many more to come - without betraying the true essence of the sport. I would like to conclude by thanking you - our valued shareholders - who flanked us along the way and spurred us to grow. We reiterate to you and all our stakeholders our commitment to living up to the Ferrari legend worldwide each and every day. February 23, 2018 Sergio Marchionne Chairman & Chief Executive Officer CERTAIN DEFINED TERMS AND NOTE ON PRESENTATION Certain Defined Terms In this report, unless otherwise specified, the terms “we,” “our,” “us,” the “Group,” the “Company” and “Ferrari” refer to Ferrari N.V., individually or together with its subsidiaries, as the context may require. References to “Ferrari N.V.” refer to the registrant (formerly named FE New N.V.) following completion of the Separation and to the registrant’s predecessor (formerly named New Business Netherlands N.V.) prior to completion of the Separation. References to “FCA” or “FCA Group” refer to Fiat Chrysler Automobiles N.V., together with its subsidiaries and its predecessor prior to the completion of the merger of Fiat S.p.A. with and into FCA on October 12, 2014 (at which time Fiat Investments N.V. was named Fiat Chrysler Automobiles N.V. or FCA), or any one of them, as the context may require. References to “Fiat” refer solely to Fiat S.p.A., the predecessor of FCA. References to the “Separation” refer to the series of transactions through which the Ferrari business was separated from FCA as described in the section “Overview”. See “Basis of Preparation of the Consolidated Financial Statements” below for additional information regarding the financial presentation. Note on Presentation This Annual Report includes the consolidated financial statements of Ferrari N.V. as of December 31, 2017 and 2016, and for the years ended December 31, 2017, 2016 and 2015 prepared in accordance with International Financial Reporting Standards as adopted by the European Union (“EU IFRS”) and with Part 9 of Book 2 of the Dutch Civil Code. We refer to these consolidated financial statements collectively as the “Consolidated Financial Statements.” Basis of Preparation of the Consolidated Financial Statements As explained in Note 1 to the Consolidated Financial Statements and in “Overview - History of the Company”, on October 29, 2014, Fiat Chrysler Automobiles N.V. (“FCA”) announced its intention to separate Ferrari S.p.A. from FCA. The separation was completed on January 3, 2016 and occurred through a series of transactions (together defined as the “Separation”) including (i) an intra-group restructuring which resulted in the Company’s acquisition of the assets and business of Ferrari North Europe Limited and the transfer by FCA of its 90 percent shareholding in Ferrari S.p.A. to the Company, (ii) the transfer of Piero Ferrari’s 10 percent shareholding in Ferrari S.p.A. to the Company, (iii) the initial public offering of common shares of the Company on the New York Stock Exchange, and (iv) the distribution, following the initial public offering, of FCA’s remaining interest in the Company to FCA’s shareholders. Following the Separation Ferrari operates as an independent, publicly traded company. The transactions described above in (i) and (ii) (referred to collectively as the “Restructuring”) were completed in October 2015. The Restructuring comprised: (i) a capital reorganization of the group under the Company, which has been accounted for in the Consolidated Financial Statements as though it had occurred effective January 1, 2015 using FCA’s basis of accounting, and (ii) the issuance of a note by the Company to FCA (the “FCA Note”), which has been reflected in the Consolidated Financial Statements only from the date in which it occurred. The remaining steps of the Separation, which were completed between January 1 and January 3, 2016 26 27 ANNUAL REPORT CERTAIN DEFINED TERMS AND NOTE ON PRESENTATION SELECTED FINANCIAL AND OTHER DATA through two consecutive demergers followed by a merger under Dutch law, have been reflected in the Consolidated Financial Statements only from the date in which the related transactions occurred and had no impact on the Company’s results of operations or financial position. As part of the Separation a new entity, FE New N.V., was created. Pursuant to the demergers the shares in the Company held by FCA were ultimately transferred to FE New N.V., with FE New N.V. issuing shares in its capital to the shareholders of FCA. In connection with the demergers, the mandatory convertible security holders of FCA also received shares in FE New N.V. On completion of the Separation the Company was merged with and into FE New N.V. and FE New N.V. was renamed Ferrari N.V. Following the Separation, the cash pooling and financial liabilities with the FCA Group were settled and the relevant agreements were terminated. The derivative contracts that were previously held by FCA were novated to Ferrari S.p.A. On January 4, 2016 the Company also completed the listing of its common shares on the Mercato Telematico Azionario, the stock exchange managed by Borsa Italiana, under the ticker symbol RACE. At December 31, 2017, the fully paid up share capital of the Company amounted to €2,504 thousand, comprising common shares and special voting shares all with nominal value of €0.01 per share. At December 31, 2017, the Company had 188,953,874 common shares and 56,493,519 special voting shares issued and outstanding. The Group’s financial information is presented in Euro. In some instances, information is presented in U.S. Dollars. All references in this Annual Report to “Euro” and “€” refer to the currency introduced at the start of the third stage of European Economic and Monetary Union pursuant to the Treaty on the Functioning of the European Union, as amended, and all references to “U.S. Dollars,” “U.S.$” and “$” refer to the currency of the United States of America (the “United States”). The language of this Annual Report is English. Certain legislative references and technical terms have been cited in their original language in order that the correct technical meaning may be ascribed to them under applicable law. Certain totals in the tables included in this Annual Report may not add due to rounding. The following tables set forth selected historical consolidated financial and other data of Ferrari and have been derived from: (i) the audited Consolidated Financial Statements, included elsewhere in this Annual Report; (ii) the audited consolidated income statement of the Company for the years ended December 31, 2014 and 2013 and the audited consolidated statement of financial position at December 31, 2015, 2014 and 2013; This financial information has been prepared in accordance with IFRS. For the purposes of the financial information set forth in this section, with the exception of the FCA Note and subsequent refinancing, which were reflected from the dates on which they occurred, the Restructuring has been retrospectively reflected as though it had occurred effective January 1, 2013. The following information should be read in conjunction with “Certain Defined Terms and Note on Presentation - Note on Presentation,” “Risk Factors,” “Operating Results” and the Consolidated Financial Statements included elsewhere in this Annual Report. Historical results for any period are not necessarily indicative of results for any future period. Consolidated Income Statement Data Net revenues EBIT Profit before taxes Net profit Net profit attributable to: Owners of the parent Non-controlling interests Basic earnings per common share (i) (1) Diluted earnings per common share (€) (1) (2) Dividend paid per share (€) Distribution paid per common share (€) (3) (4) For the years ended December 31, 2017 2016 2015 2014 2013 (€ million, except per share data) 3,417 3,105 2,854 2,762 2,335 775 746 537 535 2 2.83 2.82 — 0.635 595 567 400 399 1 2.11 2.11 — 0.46 444 434 290 288 2 1.52 1.52 — — 389 398 265 261 4 1.38 1.38 — — 364 366 246 241 5 1.27 1.27 — — (1) Retrospectively reflects the issuance of 188,923,499 common shares as if the Separation had occurred on January 1, 2013. See also Note 13 to the Consolidated Financial Statements. (2) In order to calculate the diluted earnings per common share for the year ended December 31, 2017, the weighted average number of shares outstanding has been increased to take into consideration the theoretical effect of (i) the potential common shares that would be issued under the equity incentive plan and (ii) the potential common shares that would have been issued for the Non-Executive Directors’ compensation agreement. In order to calculate the diluted earnings per common share for the year ended December 31, 2016, the weighted average numbers of shares outstanding has been increased to take into consideration the theoretical effect of the potential common shares that would have been issued for the Non-Executive Directors’ compensation agreement. For the years ended December 31, 2015, 2014 and 2013 there were no potentially dilutive instruments. See Note 13 to the Consolidated Financial Statements for additional information. (3) Following approval of the annual accounts by the shareholders at the Annual General Meeting of the Shareholders on April 14, 2017, a cash distribution of €0.635 per common share was approved, corresponding to a total distribution of €120 million. The distribution was made from the share premium reserve which is a distributable reserve under Dutch law. (4) Following approval of the annual accounts by the shareholders at the Annual General Meeting of the Shareholders on April 15, 2016, the Company paid a cash distribution of €0.46 per common share in May 2016, corresponding to a total distribution of €87 million. The distribution was made from the share premium reserve which is a distributable reserve under Dutch law. 28 29 ANNUAL REPORT Consolidated Statement of Financial Position Data Cash and cash equivalents Deposits in FCA Group cash management pools (1) Total assets Debt Total equity/(deficit) (2) Equity/(Deficit) attributable to owners of the parent Non-controlling interests Share capital At December 31, 2017 2016 2015 2014 2013 (€ million, except shares issued) 648 — 4,141 1,806 784 779 5 3 458 — 3,850 1,848 330 325 5 3 183 139 3,875 2,260 (19) (25) 6 4 134 942 4,641 510 2,478 2,470 8 4 114 684 3,895 317 2,316 2,290 26 4 Common shares issued (in thousands of shares) (3) 188,954 188,923 188,923 188,923 188,923 (1) Deposits in FCA Group cash management pools related to our participation in a group-wide cash management system at FCA prior to the Separation, where the operating cash management, main funding operations and liquidity investment of the Group were centrally coordinated by dedicated treasury companies with the objective of ensuring effective and efficient management of our funds. Following the Separation on January 3, 2016, these arrangements were terminated and we manage our liquidity and treasury function on a standalone basis. (2) The deficit at December 31, 2015 is a result of the effects of the Restructuring. See “Consolidated Statement of Changes in Equity” to the Consolidated Financial Statements for additional details. (3) The number of common shares issued retrospectively reflects the issuance of common shares (net of treasury shares), all with a nominal value of €0.01, as if the Separation had occurred on January 1, 2013. Other Statistical Information Shipments (number of cars) Average number of employees for the period For the years ended December 31, 2017 8,398 3,336 2016 8,014 3,115 2015 7,664 2,954 2014 7,255 2,843 2013 7,000 2,774 CREATING VALUE FOR OUR SHAREHOLDERS Ferrari is among the world’s leading luxury brands with unique, world-class capabilities, and a vision built on our historic foundations and strengths. We are fiercely protective of our brand, which is among the most iconic and recognizable in the world and critical to our value proposition to all of our stakeholders. We strive to maintain and enhance the power of our brand and the passion we inspire in clients and the broader community of automotive enthusiasts by continuing our rigorous production and distribution model, which promotes hard-to-satisfy demand and scarcity value in our cars. We also support our brand value by promoting a strong connection to our company and our brand among the community of Ferrari enthusiasts. We focus relentlessly on strengthening this connection by rewarding our most loyal clients through a range of initiatives, such as driving events and client activities in Maranello and at motor shows and, most importantly, by providing our most loyal and active clients with preferential access to our newest, most exclusive and highest value cars. As a result, we enjoy a strong and loyal client base with most of our cars being sold to existing Ferrari owners and approximately 32% of our clients being owners of more than one Ferrari, which reinforces the demand for our cars and the image of luxury and exclusivity inherent in our brand. Our commitment to excellence and our pursuit of innovation, state-of-the-art performance and distinction in design and engineering in our luxury cars is inseparable from our commitment to integrity, transparency and responsibility in the conduct of our business. By fully integrating environmental and social considerations with economic objectives we are able to identify potential risks and capitalize on additional opportunities, resulting in a process of continuous improvement. Sustainability is a core element of our governance model and executive management plays a direct and active role in developing and achieving our sustainability objectives under the oversight of our Board of Directors. The foundation of a responsible company rests on being fully attentive to the nature and extent of this interconnection and our understanding of both the potential effects of our activities and how those effects can be mitigated through responsible management. Responsible management requires that we consider all potential implications of our strategic decisions and projects. Ferrari’s sustainability efforts focus on our emissions reduction program, through the improvement of efficiency in our luxury cars and in our production processes, as well as through our Formula Uomo initiative, a program which places its people at the heart of the Company. We see our personnel as the cornerstone of our activities. Our commitment to environmental sustainability begins with a commitment to the community that is the home of our production campus, and the quality and safety of the working environment we provide to our personnel. As a fundamental part of our sustainability effort, Ferrari has also invested heavily to achieve independence in energy production through the extensive use of solar power and natural gas. To provide for tangible long-term value creation, we place particular emphasis on: • a governance model based on transparency and integrity; • a safe and eco-friendly working environment including proper working conditions and respect for human rights; • proper management and professional development of our employees; • mutually beneficial relationships with business partners and the communities in which we operate; • mitigation of environmental impacts from our production processes and the luxury cars we produce. The Non Financial Statement section of our 2017 Annual Report addresses those aspects of our sustainability efforts that we have identified as being of greatest importance to our internal and external stakeholders. 30 31 ANNUAL REPORT RISK FACTORS We face a variety of risks in our business. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties that we are unaware of or that we currently believe to be immaterial, may also become important factors that affect us. Risks Related to Our Business, Strategy and Operations We may not succeed in preserving and enhancing the value of the Ferrari brand, which we depend upon to drive demand and revenues. Our financial performance is influenced by the perception and recognition of the Ferrari brand, which, in turn, depends on many factors such as the design, performance, quality and image of our cars, the appeal of our dealerships and stores, the success of our promotional activities including public relations and marketing, as well as our general profile, including our brand’s image of exclusivity. The value of our brand and our ability to achieve premium pricing for Ferrari-branded products may decline if we are unable to maintain the value and image of the Ferrari brand, including, in particular, its aura of exclusivity. Maintaining the value of our brand will depend significantly on our ability to continue to produce luxury performance cars of the highest quality. The market for luxury goods generally and for luxury automobiles in particular is intensely competitive, and we may not be successful in maintaining and strengthening the appeal of our brand. Client preferences, particularly among luxury goods, can vary over time, sometimes rapidly. We are therefore exposed to changing perceptions of our brand image, particularly as we seek to attract new generations of clients and, to that end, we renovate and expand our models range. For example, the gradual expansion of hybrid engine technology will also introduce a notable change in the overall driver experience compared to the combustion engine cars of our range models to date. Any failure to preserve and enhance the value of our brand may materially and adversely affect our ability to sell our cars, to maintain premium pricing, and to extend the value of our brand into other activities profitably or at all. We selectively license the Ferrari brand to third parties that produce and sell Ferrari-branded luxury goods and therefore we rely on our licensing partners to preserve and enhance the value of our brand. If our licensees or the manufacturers of these products do not maintain the standards of quality and exclusivity that we believe are consistent with the Ferrari brand, or if such licensees or manufacturers otherwise misuse the Ferrari brand, our reputation and the integrity and value of our brand may be damaged and our business, operating results and financial condition may be materially and adversely affected. Our brand image depends in part on the success of our Formula 1 racing team. The prestige, identity, and appeal of the Ferrari brand depend in part on the continued success of the Scuderia Ferrari racing team in the Formula 1 World Championship. The racing team is a key component of our marketing strategy and may be perceived by our clients as a demonstration of the technological capabilities of our Sports and GT cars which also supports the appeal of other Ferrari-branded luxury goods. We have focused on restoring the success of our Formula 1 racing team as our most recent driver’s championship and constructors’ championship were in 2007 and 2008, respectively. We are focused on improving our racing results and restoring our historical position as the premier racing team. If we are unable to attract and retain the necessary talent to succeed in international competitions or devote the capital necessary to fund successful racing activities, the value of the Ferrari brand and the appeal of our cars and other luxury goods may suffer. Even if we are able to attract such talent and adequately fund our racing activities, there is no assurance that this will lead to competitive success for our racing team. The success of our racing team depends in particular on our ability to attract and retain top drivers and racing management and engineering talent. Our primary Formula 1 drivers, team managers and other key employees of Scuderia Ferrari are critical to the success of our racing team and if we were to lose their services, this could have a material adverse effect on the success of our racing team and correspondingly the Ferrari brand. If we are unable to find adequate replacements or to attract, retain and incentivize drivers and team managers, other key employees or new qualified personnel, the success of our racing team may suffer. As the success of our racing team forms a large part of our brand identity, a sustained period without racing success could detract from the Ferrari brand and, as a result, potential clients’ enthusiasm for the Ferrari brand and their perception of our cars, which could have an adverse effect on our business, results of operations and financial condition. If we are unable to keep up with advances in high performance car technology, our competitive position may suffer. Performance cars are characterized by leading-edge technology which is constantly evolving. In particular, advances in racing technology often lead to improved technology in road cars. Although we invest heavily in research and development, we may be unable to maintain our leading position in high performance car technology and, as a result, our competitive position may suffer. As technologies change, we plan to upgrade or adapt our cars and introduce new models in order to continue to provide cars with the latest technology. However, our cars may not compete effectively with our competitors’ cars if we are not able to develop, source and integrate the latest technology into our cars. For example, luxury performance cars will in the next few years begin to transition to hybrid technology, albeit at a slower pace compared to mass market vehicles. See “The introduction of hybrid cars is costly and its long term success is uncertain”. Developing and applying new automotive technologies is costly, and may become even more costly in the future as available technology advances and competition in the industry increases. If our research and development efforts do not lead to improvements in car performance relative to the competition, or if we are required to spend more to achieve comparable results, sales of our cars or our profitability may suffer. If our car designs do not appeal to clients, our brand and competitive position may suffer. Design and styling are an integral component of our models and our brand. Our cars have historically been characterized by distinctive designs combining the aerodynamics of a sports car with powerful, elegant lines. We believe our clients purchase our cars for their appearance as well as their performance. However, we will need to renew over time the style of our cars to differentiate the new models we produce from older models, and to reflect the broader evolution of aesthetics in our markets. We devote great efforts to the design of our cars and most of our current models are designed by Ferrari Design Centre, our in-house design team. If the design of our future models fails to meet the evolving tastes and preferences of our clients and prospective clients, or the appreciation of the wider public, our brand may suffer and our sales may be adversely affected. The value of our brand depends in part on the automobile collector and enthusiast community. An important factor in the connection of clients to the Ferrari brand is our strong relationship with the global community of automotive collectors and enthusiasts, particularly collectors and enthusiasts of Ferrari automobiles. This is influenced by our close ties to the automotive collectors’ community and our support of related events (such as car shows and driving events), at our headquarters in Maranello and through our dealers, the Ferrari museum and affiliations with regional Ferrari clubs. The support of this community also depends 32 33 ANNUAL REPORTRISK FACTORS upon the perception of our cars as collectibles, which we also support through our Ferrari Classiche services, and the active resale market for our automobiles which encourages interest over the long term. If there is a change in collector appetite or damage to the Ferrari brand, our ties to and the support we receive from this community may be diminished. Such a loss of enthusiasm for our cars from the automotive collectors’ community could harm the perception of the Ferrari brand and adversely impact our sales and profitability. Demand for luxury goods, including luxury performance cars, is volatile, which may adversely affect our operating results. Volatility of demand for luxury goods, in particular luxury performance cars, may adversely affect our business, operating results and financial condition. The markets in which we sell our cars have been subject to volatility in demand in recent periods. Demand for luxury automobiles depends to a large extent on general, economic, political and social conditions in a given market as well as the introduction of new vehicles and technologies. As a luxury performance car manufacturer and low volume producer, we compete with larger automobile manufacturers many of which have greater financial resources in order to withstand changes in the market and disruptions in demand. Demand for our cars may also be affected by factors directly impacting automobile prices or the cost of purchasing and operating automobiles, such as the availability and cost of financing, prices of raw materials and parts and components, fuel costs and governmental regulations, including tariffs, import regulation and other taxes, including taxes on luxury goods, resulting in limitations to the use of high performance sports cars or luxury goods more generally. Volatility in demand may lead to lower car unit sales, which may result in further downward price pressure and adversely affect our business, operating results and financial condition. These effects may have a more pronounced impact on us given our low volume strategy and relatively smaller scale as compared to large global mass-market automobile manufacturers. Our low volume strategy may limit potential profits, and if volumes increase our brand exclusivity may be eroded. A key to the appeal of the Ferrari brand and our marketing strategy is the aura of exclusivity and the sense of luxury which our brand conveys. A central facet to this exclusivity is the limited number of models and cars we produce and our strategy of maintaining our car waiting lists to reach the optimal combination of exclusivity and client service. Our low volume strategy is also an important factor in the prices that our clients are willing to pay for our cars. This focus on maintaining exclusivity limits our potential sales growth and profitability. On the other hand, our current growth strategy contemplates a measured but significant increase in car sales above current levels as we target a larger customer base and modes of use, and we increase our focus on GT cars. In pursuit of our strategy, we may be unable to maintain the exclusivity of the Ferrari brand. If we are unable to balance brand exclusivity with increased production, we may erode the desirability and ultimately the consumer demand for our cars. As a result, if we are unable to increase car production meaningfully or introduce new car models without eroding the image of exclusivity in our brand we may be unable to significantly increase our revenues. Our revenues from Formula 1 activities may decline and our related expenses may grow. Revenues from our Formula 1 activities depend principally on the income from our sponsorship agreements and on our share of Formula 1 revenues from broadcasting and other sources. See “Overview of our Business—Formula 1 Activities.” If we are unable to renew our existing sponsorship agreements or if we enter into new or renewed sponsorship agreements with less favorable terms, our revenues would decline. In addition, our share of Formula 1 results may decline if either our team’s performance worsens compared to other competing teams, or if the overall Formula 1 business suffers. Furthermore, in order to compete effectively on track we have been investing significant resources in research and development and to competitively compensate the best available drivers and other racing team members. These expenses also vary based on changes in Formula 1 regulations that require modification to our racing engines and cars. These expenses are expected to continue, and may grow further, including as a result of any changes in Formula 1 regulations, which would negatively affect our results of operations. In addition the company that owns the Formula 1 business was recently acquired by new owners and it is uncertain whether and how the arrangements relating to the participation of Ferrari and the other teams competing in the championship may change in the future particularly in the period following the 2020 expiration of the current arrangements between racing teams and the operator of Formula 1. We are currently evaluating the terms and conditions under which we may continue to participate in the Formula 1 championship after the 2020 season and we cannot be certain that we or other racing teams will be successful in negotiating acceptable terms and conditions for continued participation. If we were to withdraw from Formula 1 this would affect our marketing and brand strategies and we currently are unable to predict the consequences on our business, financial condition and results of operations. See “Overview of our Business—Formula 1 Activities.” for a description of the change in ownership of Formula 1. The small number of car models we produce and sell may result in greater volatility in our financial results. We depend on the sales of our range and special series models and our limited edition supercar to generate our revenues. Our current product range consists of six range models (including three sports cars and three GT cars), one special series car and one limited edition supercar. While we anticipate expanding our car offerings, we expect that a limited number of models will continue to account for a large portion of our revenues at any given time in the foreseeable future. Therefore, our future operating results depend upon the continued market acceptance of each model in our line-up. There can be no assurance that our cars will continue to be successful in the market. It generally takes several years from the beginning of the development phase to the start of production for a new model and the car development process is capital intensive. As a result, we would likely be unable to replace quickly the revenue lost from one of our main car models if it does not achieve market acceptance. Furthermore, our revenues and profits may also be affected by our “special series” and limited edition cars that we launch from time to time and which are typically priced higher than our range models. There can be no assurance that we will be successful in developing, producing and marketing additional new cars that will sustain sales growth in the future. Engine production revenues are dependent on Maserati’s ability to sell its cars. We produce V8 and V6 engines for Maserati. In particular, we have a multi-year arrangement with Maserati to provide V6 engines through 2020, which may be followed by further production runs in future periods. In 2017 we recorded net revenues of €302 million from the sales of engines to Maserati. While Maserati is required to compensate us for certain costs we may incur, such as penalties from our suppliers, in the event that the sales of Maserati cars decline, or do not increase at the expected rate, such an event would adversely affect our revenues from the sale of engines. 34 35 ANNUAL REPORTRISK FACTORS Our business is subject to changes in client preferences and trends in the automotive and luxury industry. Our continued success depends in part on our ability to originate and define product and trends in the automotive and luxury industry, as well as to anticipate and respond promptly to changing consumer demands and automotive trends in the design, styling, technology, production, merchandising and pricing of our products. Our products must appeal to a client base whose preferences cannot be predicted with certainty and are subject to rapid change. Evaluating and responding to client preferences has become even more complex in recent years, due to our expansion in new geographical markets. The introduction of electric and hybrid technology and the associated changes in customer preferences that may follow are also a challenge we will face in future periods. See also “If we are unable to keep up with advances in high performance car technology, our competitive position may suffer” and “The introduction of hybrid cars is costly and its long term success is uncertain”. If we misjudge the market for our products, we and our dealers may be faced with excess inventories for some cars and missed opportunities with others. In addition, there can be no assurance that we will be able to produce, distribute and market new products efficiently or that any product category that we may expand or introduce will achieve sales levels sufficient to generate profits. We will encounter this risk, for example, if we decide to expand our range to include one or more luxury high performance utility vehicles. Furthermore this risk is particularly pronounced as we expand in accordance with our strategy into adjacent segments of the luxury industry, where we do not have a level of experience and market presence comparable to the one we have in the automotive industry. Any of these risks could have a material adverse effect on our business, results of operations and financial condition. Global economic conditions may adversely affect us. Our sales volumes and revenues may be affected by overall general economic conditions. Deteriorating general economic conditions may affect disposable incomes and reduce consumer wealth impacting client demand, particularly for luxury goods, which may negatively impact our profitability and put downward pressure on our prices and volumes. Furthermore, during recessionary periods, social acceptability of luxury purchases may decrease and higher taxes may be more likely to be imposed on certain luxury goods including our cars, which may affect our sales. Adverse economic conditions may also affect the financial health and performance of our dealers in a manner that will affect sales of our cars or their ability to meet their commitments to us. Many factors affect the level of consumer spending in the luxury performance car industry, including the state of the economy as a whole, stock market performance, interest and exchange rates, inflation, political uncertainty, the availability of consumer credit, tax rates, unemployment levels and other matters that influence consumer confidence. In general, although our sales have historically been comparatively resilient in periods of economic turmoil, sales of luxury goods tend to decline during recessionary periods when the level of disposable income tends to be lower or when consumer confidence is low. We distribute our products internationally and we may be affected by downturns in general economic conditions or uncertainties regarding future economic prospects that may impact the countries in which we sell a significant portion of our products. In particular, the majority of our current sales are in the EU and in the United States; if we are unable to expand in emerging markets, a downturn in mature economies such as the EU and the United States may negatively affect our financial performance. The EU economies in particular have suffered a prolonged period of slow growth since the 2008 financial crisis. In addition, uncertainties regarding future trade arrangements and industrial policies in various countries or regions, such as in the United Kingdom following the referendum to leave the European Union (see further “We may be adversely affected by the UK determination to leave the European Union (Brexit)”) create additional macroeconomic risk. In the United States, any policy to discourage import into the United States of vehicles produced elsewhere could adversely affect our operations. Any new policies and any steps we may take to address such new policies may have an adverse effect on our business, financial condition and results of operations. In addition, a further economic slowdown or changes in the economic and political situation in the Middle East region may impact the demand for our products in that market, which may adversely impact our revenues in the relevant periods. A significant decline in the EU, the global economy or in the specific economies of our markets, or in consumers’ confidence, could have a material adverse effect on our business. See also “Developments in emerging markets may adversely affect out business”. New laws, regulations, or policies of governmental organizations regarding increased fuel economy requirements, reduced greenhouse gas or pollutant emissions, or vehicle safety, or changes in existing laws, may have a significant effect on our costs of operation and/or how we do business. We are subject throughout the world to comprehensive and constantly evolving laws, regulations and policies. We expect the extent of the legal and regulatory requirements affecting our business and our costs of compliance to continue to increase significantly in the future. In Europe and the United States, for example, significant governmental regulation is driven by environmental, fuel economy, vehicle safety and noise emission concerns. Evolving regulatory requirements could significantly affect our product development plans and may limit the number and types of cars we sell and where we sell them, which may affect our revenue. Governmental regulations may increase the costs we incur to design, develop and produce our cars and may affect our product portfolio. Regulation may also result in a change in the character or performance characteristics of our cars which may render them less appealing to our clients. We anticipate that the number and extent of these regulations, and their effect on our cost structure and product line-up, will increase significantly in the future. Current European legislation limits fleet average greenhouse gas emissions for new passenger cars, and new targets have been set in 2014 with more stringent emission targets applicable to the 2017-2021 period. Due to our small volume manufacturer (“SVM”) status we benefit from a derogation from the existing emissions requirement and we are instead required to meet, by 2021, alternative targets for our fleet of EU-registered vehicles. In the United States, the U.S. Environmental Protection Agency (“EPA”) and the National Highway Traffic Safety Administration (“NHTSA”) have set the federal standards for passenger cars and light trucks to meet certain combined average greenhouse gas (“GHG”) and fuel economy (“CAFE”) levels and more stringent standards have been prescribed for model years 2017 through 2025. As a SVM that is able to demonstrate our operational independence from FCA, we expect to benefit from a derogation from currently applicable standards. We have also petitioned the EPA for alternative standards for the 2017-2021 model years, which are aligned to our technical and economic capabilities. In September 2016 we petitioned NHTSA for recognition as an independent manufacturer of less than 10,000 vehicles produced globally and we proposed alternative CAFE standards for Model Years 2017, 2018 and 2019. Then, in December, 2017, we amended the petition by proposing alternative CAFE standards for Model Years 2016, 2017 and 2018 instead, covering also the 2016 Model Year. NHTSA have not yet responded to our petition. We will need in the future to file with NHTSA a petition for 2019-2020 and 2021 model years. If our petitions are rejected, we will not be able to benefit from the more favorable CAFE standards levels which we have petitioned for and this may require us to purchase additional CAFE credits in order to comply with applicable CAFE standards. 36 37 ANNUAL REPORTRISK FACTORS In addition, we are subject to legislation relating to the emission of other air pollutants such as, among others, the “Tier 3” Motor Vehicle Emission and Fuel Standards issued by the EPA, and the Zero Emission Vehicle regulation in California, which are subject to similar derogations for SVMs, as well as vehicle safety legislation. NHTSA also recently published guidelines for driver distraction, and the associated compliance costs may be substantial. Other governments around the world, such as those in Canada, South Korea, China and certain Middle Eastern countries are also creating new policies to address these issues which could be even more stringent than the U.S. or European requirements. As in the United States and Europe, these government policies if applied to us could significantly affect our product development plans. In China, for example, Stage IV fuel consumption regulation targets a national average fuel consumption of 5.0L/100km by 2020. In response to severe air quality issues in Beijing and other major Chinese cities, in 2016 the Chinese government published a more stringent emissions program (National 6), providing two different levels of stringency effective starting from 2020. Moreover autonomous Chinese regions and municipalities are allowed to implement these more stringent requirements in advance of 2020. If local Chinese regions and municipalities implement such requirements before 2020 this could lead us to revise our product development and production plans in China, incur significant costs and change marketing strategies in China, which may affect our profits. We could lose our status as a SVM in the EU, the United States and other countries if we do not continue to meet all of the necessary eligibility criteria under applicable regulations as they evolve. In order to meet these criteria we may need to modify our growth plans or other operations. Furthermore, even if we continue to benefit from derogations as a SVM, we will be subject to alternative standards that the regulators deem appropriate for our technical and economic capabilities and such alternative standards may be significantly more stringent than those currently applicable to us. Under these existing regulations, as well as new or stricter rules or policies, we could be subject to sizable civil penalties or have to restrict or modify product offerings drastically to remain in compliance. We may have to incur substantial capital expenditures and research and development expenditures to upgrade products and manufacturing facilities, which would have an impact on our cost of production and results of operation. For a description of recent fines we have paid and a summary of the regulation referred to in the paragraphs above please see “Overview of our Business - Regulatory Matters”. In the future, the advent of self-driving technology may result in regulatory changes that we cannot predict but may include limitations or bans on human driving in specific areas. Similarly, driving bans on combustion engine vehicles could be imposed, particularly in metropolitan areas, as a result of progress in electric and hybrid technology. Any such future developments may adversely affect the demand for our cars and our business. In September 2017 the Chinese government issued the Administrative Measures on CAFC (Corporate Average Fuel Consumption) and NEV (New Energy Vehicle) Credits. This regulation establishes mandatory CAFC requirements, while providing additional flexibilities for SVMs (less than 2,000 units/year imported in China) that achieve a certain minimum CAFC yearly improvement rate. Because our CAFC is expected to exceed the regulatory ceiling, we will be required to purchase NEV credits. There is no assurance that an adequate market for NEV credits will develop in China and if we are not able to secure sufficient NEV credits this may adversely affect our business in China. Our growth strategy exposes us to risks. Our growth strategy includes a controlled expansion of our sales and operations, including the launching of new car models and expanding sales and dealer operations in targeted growth regions internationally. In particular, our growth strategy requires us to expand operations in regions that we have identified as having relatively high growth potential. We may encounter difficulties, including more significant competition in entering and establishing ourselves in these markets. Our growth depends on the continued success of our existing cars, as well as the successful design and introduction of new cars. Our ability to create new cars and to sustain existing car models is affected by whether we can successfully anticipate and respond to consumer preferences and car trends. The failure to develop and launch successful new cars could hinder the growth of our business. Also, any delay in the development or launch of a new product could result in others bringing new products and technology to market first, which could compromise our competitive position. As part of our growth strategy, we plan to broaden the range of our models to capture additional customer demand for different types of vehicles and modes of utilization. For example, we are currently evaluating the development and launch of a luxury high performance utility vehicle. In addition, we will gradually expand the use of hybrid technology in our road cars, consistent with customer preferences and broader industry trends. While we will seek to ensure that these changes remain fully consistent with the Ferrari car identity, we cannot be certain that they will prove profitable and commercially successful. Our growth strategy may expose us to new business risks that we may not have the expertise, capability or the systems to manage. This strategy will also place significant demands on us by requiring us to continuously evolve and improve our operational, financial and internal controls. Continued expansion also increases the challenges involved in maintaining high levels of quality, management and client satisfaction, recruiting, training and retaining sufficient skilled management, technical and marketing personnel. If we are unable to manage these risks or meet these demands, our growth prospects and our business, results of operation and financial condition could be adversely affected. We plan to redesign our international network footprint and skill set. We also plan to open additional retail stores in international markets. We do not yet have significant experience directly operating in many of these markets, and in many of them we face established competitors. Many of these countries have different operational characteristics, including but not limited to employment and labor, transportation, logistics, real estate, environmental regulations and local reporting or legal requirements. Consumer demand and behavior, as well as tastes and purchasing trends may differ in these markets, and as a result, sales of our products may not be successful, or the margins on those sales may not be in line with those we currently anticipate. Furthermore, such markets will have upfront short-term investment costs that may not be accompanied by sufficient revenues to achieve typical or expected operational and financial performance and therefore may be dilutive to us in the short-term. In many of these countries, there is significant competition to attract and retain experienced and talented employees. Consequently, if our international expansion plans are unsuccessful, our business, results of operation and financial condition could be materially adversely affected. 38 39 ANNUAL REPORTRISK FACTORS The introduction of hybrid cars is costly and its long term success is uncertain. Developments in emerging markets may adversely affect our business. We intend to gradually introduce hybrid technology in both our sports and GT cars ranges. In accordance with our strategy, we believe hybrid technology will be key to providing continuing performance upgrades to our sports car customers, and will also help us capture the preferences of the urban, affluent GT cars purchasers whom we are increasingly targeting. While we have introduced hybrid technology in some models, such as LaFerrari and LaFerrari Aperta, the integration of such technology more broadly into our car portfolio over time may present challenges and costs. We expect to increase R&D spending in 2018 particularly on hybrid technology-related projects. Although we expect to price our future hybrid cars appropriately to recoup the investments and expenditures we are making, we cannot be certain that these expenditures will be fully recovered. In addition, this transformation of our car technology creates risks and uncertainties such as the impact on driver experience, and the impact on the cars’ residual value over time, both of which may be met with an unfavorable market reaction. Other manufacturers of luxury sports cars may be more successful in implementing hybrid technology. Longer term, although we believe that combustion engines will continue to be fundamental to the Ferrari driver experience, pure electric cars may become the prevalent technology for performance sports cars thereby displacing hybrid models. See also “If we are unable to keep up with advances in high performance car technology, our competitive position may suffer.” Because hybrid technology is a core component of our strategy, if the introduction of hybrid cars proves too costly or is unsuccessful in the market, our business and results of operations could be materially adversely affected. Our indebtedness could adversely affect our operations and we may face difficulties in servicing or refinancing our debt. As of December 31, 2017, our total consolidated debt was approximately €1,806 million (which includes our financial services), including €500 million aggregate principal amount of 1.500% notes due 2023, and €700 million aggregate principal amount of 0.250% notes due 2021, see “Operating Results - Liquidity and Capital Resources”. Our current and long-term debt requires us to dedicate a portion of our cash flow to service interest and principal payments and, if interest rates rise, this amount may increase. In addition, our existing debt may limit our ability to raise further capital to execute our growth strategy or otherwise may place us at a competitive disadvantage relative to competitors that have less debt. The agreements governing our indebtedness do not prohibit the incurrence of additional indebtedness. To the extent we become more leveraged, the risks described above would increase. We may also have difficulty refinancing our existing debt or incurring new debt on terms that we would consider to be commercially reasonable, if at all. We face competition in the luxury performance car industry. We face competition in all product categories and markets in which we operate. We compete with other international luxury performance car manufacturers which own and operate well-known brands of high- quality cars, some of which form part of larger automotive groups and may have greater financial resources and bargaining power with suppliers than we do, particularly in light of our policy to maintain low volumes in order to preserve and enhance the exclusivity of our cars. We believe that we compete primarily on the basis of our brand image, the performance and design of our cars, our reputation for quality and the driving experience for our customers. If we are unable to compete successfully, our business, results of operations and financial condition could be adversely affected. We operate in a number of emerging markets, both directly and through our dealers and we have experienced increasing demand in China and other regions in Asia. Our strategy contemplates expanding our sales in Asia, recognizing the increasing personal wealth in these markets. While demand in these markets has increased in recent years due to sustained economic growth and growth in personal income and wealth, we are unable to foresee the extent to which economic growth in these emerging markets will be sustained. For example, rising geopolitical tensions and potential slowdowns in the rate of growth there and in other emerging markets could limit the opportunity for us to increase unit sales and revenues in those regions in the near term. Our exposure to emerging countries is likely to increase, as we pursue expanded sales in such countries. Economic and political developments in emerging markets, including economic crises or political instability, have had and could have in the future material adverse effects on our results of operations and financial condition. Further, in certain markets in which we or our dealers operate, required government approvals may limit our ability to act quickly in making decisions on our operations in those markets. Other government actions may also impact the market for luxury goods in these markets, such as tax changes or the active discouragement of luxury purchases. Maintaining and strengthening our position in these emerging markets is a key component of our global growth strategy. However, initiatives from several global luxury automotive manufacturers have increased competitive pressures for luxury cars in several emerging markets. As these markets continue to grow, we anticipate that additional competitors, both international and domestic, will seek to enter these markets and that existing market participants will try to aggressively protect or increase their market share. Increased competition may result in pricing pressures, reduced margins and our inability to gain or hold market share, which could have a material adverse effect on our results of operations and financial condition. See also “Global economic conditions may adversely us”. Our success depends largely on the ability of our current management team to operate and manage effectively. Our success depends on the ability of our senior executives and other members of management to effectively manage our business as a whole and individual areas of the business. Our management team particularly benefits from the leadership of our CEO and Chairman, Sergio Marchionne, who engineered the operating and financial turnaround of Fiat and Chrysler and the global expansion of FCA into the eighth largest automaker in the world (based on 2017 vehicle sales worldwide). Our employees, particularly in our production facilities in and around Maranello, Italy include many highly skilled engineers, technicians and artisans. If we were to lose the services of any of these senior executives or key employees, this could have a material adverse effect on our business, operating results and financial condition. We have developed a management succession plans that we believe are appropriate in the circumstances, although it is difficult to predict with any certainty that we will replace these individuals with persons of equivalent experience and capabilities. If we are unable to find adequate replacements or to attract, retain and incentivize senior executives, other key employees or new qualified personnel, our business, results of operations and financial condition may suffer. We rely on our dealer network to provide sales and services. We do not own our Ferrari dealers and virtually all of our sales are made through our network of dealerships located throughout the world. If our dealers are unable to provide sales or service quality that our 40 41 ANNUAL REPORTRISK FACTORS clients expect or do not otherwise adequately project the Ferrari image and its aura of luxury and exclusivity, the Ferrari brand may be negatively affected. We depend on the quality of our dealership network and our business, operating results and financial condition could be adversely affected if our dealers suffer financial difficulties or otherwise are unable to perform to our expectations. Furthermore, we may experience disagreements or disputes in the course of our relationship with our dealers or upon termination which may lead to financial costs, disruptions and reputational harm. Our growth strategy also depends on our ability to attract a sufficient number of quality new dealers to sell our products in new areas. We may face competition from other luxury performance car manufacturers in attracting quality new dealers, based on, among other things, dealer margin, incentives and the performance of other dealers in the region. If we are unable to attract a sufficient number of new Ferrari dealers in targeted growth areas, our prospects could be materially adversely affected. We depend on our suppliers, many of which are single source suppliers; and if these suppliers fail to deliver necessary raw materials, systems, components and parts of appropriate quality in a timely manner, our operations may be disrupted. Our business depends on a significant number of suppliers, which provide the raw materials, components, parts and systems we require to manufacture cars and parts and to operate our business. We use a variety of raw materials in our business including aluminum, and precious metals such as palladium and rhodium. We source materials from a limited number of suppliers. We cannot guarantee that we will be able to maintain access to these raw materials, and in some cases this access may be affected by factors outside of our control and the control of our suppliers. In addition, prices for these raw materials fluctuate and while we seek to manage this exposure, we may not be successful in mitigating these risks. As with raw materials, we are also at risk of supply disruption and shortages in parts and components we purchase for use in our cars. We source a variety of key components from third parties, including transmissions, brakes, driving-safety systems, navigation systems, mechanical, electrical and electronic parts, plastic components as well as castings and tires, which makes us dependent upon the suppliers of such components. In the future, we will also require a greater number of batteries and other components of hybrid engines as we introduce hybrid technology in our range model offering, and we expect producers of batteries will be called to increase the levels of supply as the shift to hybrid or electric technology gathers pace in the industry. While we obtain components from multiple sources whenever possible, similar to other small volume car manufacturers, most of the key components we use in our cars are purchased by us from single source suppliers. We generally do not qualify alternative sources for most of the single-sourced components we use in our cars and we do not maintain long-term agreements with a number of our suppliers. Furthermore, we have limited ability to monitor the financial stability of our suppliers. While we believe that we may be able to establish alternate supply relationships and can obtain or engineer replacement components for our single-sourced components, we may be unable to do so in the short term, or at all, at prices or costs that we believe are reasonable. Qualifying alternate suppliers or developing our own replacements for certain highly customized components of our cars may be time consuming, costly and may force us to make costly modifications to the designs of our cars. For example, Takata Corporation (“Takata”) is currently the principal supplier of the airbags installed in our cars. Defective airbags manufactured by Takata have led to widespread recalls by several automotive manufacturers starting in 2015, including us (see further “Car recalls may be costly and may harm our reputation”; see “Overview of our Business - Regulatory Matters - Vehicle Safety”. Takata filed for bankruptcy protection in Japan and the United States in June 2017. Failure by Takata to continue the supply of airbags may cause significant disruption to our operations. In the past, we have replaced certain suppliers because they failed to provide components that met our quality control standards. The loss of any single or limited source supplier or the disruption in the supply of components from these suppliers could lead to delays in car deliveries to our clients, which could adversely affect our relationships with our clients and also materially and adversely affect our operating results and financial condition. Supply of raw materials, parts and components may also be disrupted or interrupted by natural disasters, as was the case in 2012 following the earthquake in the Emilia Romagna region of Italy. Changes in our supply chain have in the past resulted and may in the future result in increased costs and delays in car production. We have also experienced cost increases from certain suppliers in order to meet our quality targets and development timelines and because of design changes that we have made. We may experience similar cost increases in the future. Additionally, we are negotiating with existing suppliers for cost reductions, seeking new and less expensive suppliers for certain parts, and attempting to redesign certain parts to make them less expensive to produce. If we are unsuccessful in our efforts to control and reduce supplier costs while maintaining a stable source of high quality supplies, our operating results will suffer. Additionally, cost reduction efforts may disrupt our normal production processes, thereby harming the quality or volume of our production. Furthermore, if our suppliers fail to provide components in a timely manner or at the level of quality necessary to manufacture our cars, our clients may face longer waiting periods which could result in negative publicity, harm our reputation and relationship with clients and have a material adverse effect on our business, operating results and financial condition. We depend on our manufacturing facilities in Maranello and Modena. We assemble all of the cars that we sell and manufacture, and all of the engines we use in our cars and sell to Maserati, at our production facility in Maranello, Italy, where we also have our corporate headquarters. We manufacture all of our car chassis in a nearby facility in Modena, Italy. Our Maranello or Modena plants could become unavailable either permanently or temporarily for a number of reasons, including contamination, power shortage or labor unrest. Alternatively, changes in law and regulation, including export, tax and employment laws and regulations, or economic conditions, including wage inflation, could make it uneconomic for us to continue manufacturing our cars in Italy. In the event that we were unable to continue production at either of these facilities or it became uneconomic for us to continue to do so, we would need to seek alternative manufacturing arrangements which would take time and reduce our ability to produce sufficient cars to meet demand. Moving manufacturing to other locations may also affect the perception of our brand and car quality among our clients. Such a transfer would materially reduce our revenues and could require significant investment, which as a result could have a material adverse effect on our business, results of operations and financial condition. Maranello and Modena are located in the Emilia-Romagna region of Italy which has the potential for seismic activity. For instance, in 2012 a major earthquake struck the region, causing production at our facilities to be temporarily suspended for a day. If major disasters such as earthquakes, fires, floods, hurricanes, wars, terrorist attacks, pandemics or other events occur, our headquarters and production facilities may be seriously damaged, or we may stop or delay production and shipment of our cars. As such damage from disasters or unpredictable events could have a material adverse impact on our business, results from operations and financial condition. 42 43 ANNUAL REPORTRISK FACTORS Car sales depend in part on the availability of affordable financing. In certain regions, financing for new car sales has been available at relatively low interest rates for several years due to, among other things, expansive government monetary policies. Recent pronouncements of governments and central banks point to a change in the policy environment that may lead to a gradual contraction of monetary policies in coming periods. To the extent that interest rates rise generally, market rates for new car financing are expected to rise as well, which may make our cars less affordable to clients or cause consumers to purchase less expensive cars, adversely affecting our results of operations and financial condition. Additionally, if consumer interest rates increase substantially or if financial service providers tighten lending standards or restrict their lending to certain classes of credit, our clients may choose not to, or may not be able to, obtain financing to purchase our cars. clients, such dealers and retail clients may not have sufficient access to financing to purchase or lease our cars. As a result, our car sales and market share may suffer, which would adversely affect our results of operations and financial condition. Our dealer and retail customer financing in Europe are mainly provided through our partnership with FCA Bank S.p.A. (“FCA Bank”), a joint venture between FCA Italy S.p.A. and Crédit Agricole Consumer Finance S.A. (“CACF”). If we fail to maintain our partnership with FCA Bank or in the event of a termination of the joint venture or change of control of one of our joint venture partners, we may not be able to find a suitable alternative partner with similar resources and experience and continue to offer financing services to support the sales of Ferrari cars in key European markets, which could adversely affect our results of operations and financial condition. We may not be able to provide adequate access to financing for our dealers and clients, and our financial services operations may be disrupted. We rely on our licensing and franchising partners to preserve the value of our licenses and the failure to maintain such partners could harm our business. Our dealers enter into wholesale financing arrangements to purchase cars from us to hold in inventory or to use in showrooms and facilitate retail sales, and retail clients use a variety of finance and lease programs to acquire cars. In most markets, we rely on controlled finance companies and commercial relationships with third parties, including third party financial institutions, to provide financing to our dealers and retail clients. Finance companies are subject to various risks that could negatively affect their ability to provide financing services at competitive rates, including: • the performance of loans and leases in their portfolio, which could be materially affected by delinquencies or defaults; • higher than expected car return rates and the residual value performance of cars they lease; and • fluctuations in interest rates and currency exchange rates. Furthermore, to help fund our retail and wholesale financing business, our financial services companies also access forms of funding available from the banking system in each market, including sales or securitization of receivables either in negotiated sales or through securitization programs. For example, in 2016, Ferrari Financial Services Inc. carried out revolving securitizations raising an aggregate of $481 million of initial proceeds. At December 31, 2017, an amount of $667 million was outstanding under revolving securitizations carried out by Ferrari Financial Services Inc. See “Operating Results - Liquidity and Capital Resources”. Should we lose the ability to access the securitization market at advantageous terms or at all, the funding of our wholesale financing business would become more difficult and expensive and our financial condition may be adversely affected. Any financial services provider, including our controlled finance companies, will face other demands on its capital, as well as liquidity issues relating to other investments or to developments in the credit markets. Furthermore, they may be subject to regulatory changes that may increase their costs, which may impair their ability to provide competitive financing products to our dealers and retail clients. To the extent that a financial services provider is unable or unwilling to provide sufficient financing at competitive rates to our dealers and retail We currently have multi-year agreements with licensing partners for various Ferrari-branded products in the sports, lifestyle and luxury retail segments. We also have multi-year agreements with franchising partners for our Ferrari stores and theme park. In the future, we may enter into additional licensing or franchising arrangements. Many of the risks associated with our own products also apply to our licensed products and franchised stores. In addition, there are unique problems that our licensing or franchising partners may experience, including risks associated with each licensing partner’s ability to obtain capital, manage its labor relations, maintain relationships with its suppliers, manage its credit and bankruptcy risks, and maintain client relationships. While we maintain significant control over the products produced for us by our licensing partners and the franchisees running our Ferrari stores and theme parks, any of the foregoing risks, or the inability of any of our licensing or franchising partners to execute on the expected design and quality of the licensed products, Ferrari stores and theme park, or otherwise exercise operational and financial control over its business, may result in loss of revenue and competitive harm to our operations in the product categories where we have entered into such licensing or franchising arrangements. While we select our licensing and franchising partners with care, any negative publicity surrounding such partners could have a negative effect on licensed products, the Ferrari stores and theme parks or the Ferrari brand. Further, while we believe that we could replace our existing licensing or franchising partners if required, our inability to do so for any period of time could materially adversely affect our revenues and harm our business. We depend on the strength of our trademarks and other intellectual property rights. We believe that our trademarks and other intellectual property rights are fundamental to our success and market position. Therefore, our business depends on our ability to protect and promote our trademarks and other intellectual property rights. Accordingly, we devote substantial efforts to the establishment and protection of our trademarks and other intellectual property rights such as registered designs and patents on a worldwide basis. We believe that our trademarks and other intellectual property rights are adequately supported by applications for registrations, existing registrations and other legal protections in our principal markets. However, we cannot exclude the possibility that our intellectual property rights may be challenged by others, or that we may be unable to register our trademarks or otherwise adequately protect them in some jurisdictions. If a third party were to register our trademarks, or similar trademarks, in a country where we have not successfully registered such trademarks, it could create a barrier to our commencing trade under those marks in that country. 44 45 ANNUAL REPORTRISK FACTORS Third parties may claim that we infringe their intellectual property rights. We believe that we hold all the rights required for our business operations (including intellectual property rights and third-party licenses). However, we are exposed to potential claims from third parties alleging that we infringe their intellectual property rights, since many competitors and suppliers also submit patent applications for their inventions and secure patent protection or other intellectual property rights. If we are unsuccessful in defending against any such claim, we may be required to pay damages or comply with injunctions which may disrupt our operations. We may also as a result be forced to enter into royalty or licensing agreements on unfavorable terms or to redesign products to comply with third parties’ intellectual property rights. If our cars do not perform as expected our ability to develop, market and sell our cars could be harmed. Our cars may contain defects in design and manufacture that may cause them not to perform as expected or that may require repair. There can be no assurance that we will be able to detect and fix any defects in the cars prior to their sale to consumers. Our cars may not perform in line with our clients’ evolving expectations or in a manner that equals or exceeds the performance characteristics of other cars currently available. For example, our newer cars may not have the durability or longevity of current cars, and may not be as easy to repair as other cars currently on the market. Any product defects or any other failure of our performance cars to perform as expected could harm our reputation and result in adverse publicity, lost revenue, delivery delays, product recalls, product liability claims, harm to our brand and reputation, and significant warranty and other expenses, and could have a material adverse impact on our business, operating results and financial condition. Car recalls may be costly and may harm our reputation. We have in the past and we may from time to time in the future be required to recall our products to address performance, compliance or safety-related issues. We may incur costs for these recalls, including replacement parts and labor to remove and replace the defective parts. For example, in the course of 2015 and 2016, we issued a series of recalls relating to defective air bags manufactured by Takata and installed on certain of our models. Also in light of uncertainties in our ability to recover the recall costs from Takata, which filed for bankruptcy in June 2017, we have recorded a provision regarding this matter which amounted to €35 million as of December 31, 2017. For a description of these and other recent recalls , see “Overview of our Business—Regulatory Matters—Vehicle Safety”. In addition, regulatory oversight of recalls, particularly in the vehicle safety, has increased recently. Any product recalls can harm our reputation with clients, particularly if consumers call into question the safety, reliability or performance of our cars. Any such recalls could harm our reputation and result in adverse publicity, lost revenue, delivery delays, product liability claims and other expenses, and could have a material adverse impact on our business, operating results and financial condition. We may become subject to product liability claims, which could harm our financial condition and liquidity if we are not able to successfully defend or insure against such claims. We may become subject to product liability claims, which could harm our business, operating results and financial condition. The automobile industry experiences significant product liability claims and we have inherent risk of exposure to claims in the event our cars do not perform as expected or malfunction resulting in personal injury or death. A successful product liability claim against us could require us to pay a substantial monetary award. Moreover, a product liability claim could generate substantial negative publicity about our cars and business, adversely affecting our reputation and inhibiting or preventing commercialization of future cars which could have a material adverse effect on our brand, business, operating results and financial condition. While we seek to insure against product liability risks, insurance may be insufficient to protect against any monetary claims we may face and will not mitigate any reputational harm. Any lawsuit seeking significant monetary damages may have a material adverse effect on our reputation, business and financial condition. We may not be able to secure additional product liability insurance coverage on commercially acceptable terms or at reasonable costs when needed, particularly if we face liability for our products and are forced to make a claim under such a policy. We are exposed to risks in connection with product warranties as well as the provision of services. A number of our contractual and legal requirements oblige us to provide extensive warranties to our clients, dealers and national distributors. There is a risk that, relative to the guarantees and warranties granted, the calculated product prices and the provisions for our guarantee and warranty risks have been set or will in the future be set too low. There is also a risk that we will be required to extend the guarantee or warranty originally granted in certain markets for legal reasons, or provide services as a courtesy or for reasons of reputation where we are not legally obliged to do so, and for which we will generally not be able to recover from suppliers or insurers. If we were to lose our Authorized Economic Operator certificate, we may be required to modify our current business practices and to incur increased costs, as well as experience shipment delays. Because we ship and sell our cars in numerous countries, the customs regulations of various jurisdictions are important to our business and operations. To expedite customs procedure, we applied for, and currently hold, the European Union’s Authorized Economic Operator (AEO) certificate. The AEO certificate is granted to operators that meet certain requirements regarding supply chain security and the safety and compliance with law of the operator’s customs controls and procedures. Operators are audited periodically for continued compliance with the requirements. The AEO certificate allows us to benefit from special expedited customs treatment, which significantly facilitates the shipment of our cars in the various markets where we operate. The AEO certificate is subject to mandatory audit review by May 1, 2019 according to the new European Customs Legislation and therefore we will need to implement all necessary organization changes in order to comply with the new requirements. If we were to lose the AEO status, including for failure to meet one of the certification’s requirements, we would be required to change our business practices and to adopt standard customs procedures for the shipment of our cars. This could result in increased costs and shipment delays, which, in turn, could negatively affect our results of operations. Labor laws and collective bargaining agreements with our labor unions could impact our ability to operate efficiently. All of our production employees are represented by trade unions, are covered by collective bargaining agreements and/or are protected by applicable labor relations regulations that may restrict our ability to modify operations and reduce costs quickly in response to changes in market conditions. These regulations and the provisions in our collective bargaining agreements may impede our ability to restructure our business successfully to compete more efficiently and effectively, especially with those automakers whose employees are not represented by trade unions or are subject to less stringent regulations, which could have a material adverse effect on our results of operations and financial condition. 46 47 ANNUAL REPORTRISK FACTORS We are subject to risks associated with exchange rate fluctuations, interest rate changes, credit risk and other market risks. We may be adversely affected by the UK determination to leave the European Union (Brexit). We operate in numerous markets worldwide and are exposed to market risks stemming from fluctuations in currency and interest rates. The exposure to currency risk is mainly linked to the differences in geographic distribution of our sourcing and manufacturing activities from those in our commercial activities, as a result of which our cash flows from sales are denominated in currencies different from those connected to purchases or production activities. For example, we incur a large portion of our capital and operating expenses in Euro while we receive the majority of our revenues in currencies other than Euro. In addition, foreign exchange movements might also negatively affect the relative purchasing power of our clients which could also have an adverse effect on our results of operations. For example, in the second half of 2016, the foreign exchange markets had been subject to a high degree of volatility and the U.S. dollar appreciated significantly against the Euro while the pound sterling depreciated significantly against both the U.S. dollar and the Euro. The U.S. dollar trend was partially reversed in 2017, and in the initial months of 2018 the U.S. dollar has continued to depreciate considerably against the Euro. If this U.S. dollar weakness persists or increases, we expect that it will adversely impact our revenues and results of operations in 2018. Changes in exchange rates between the Euro on the one hand and, on the other hand, the other main foreign currencies in which we operate, also affect our revenues and results of operations. See “Operating Results”. We seek to manage risks associated with fluctuations in currency through financial hedging instruments. Although we seek to manage our foreign currency risk in order to minimize any negative effects caused by rate fluctuations, including through hedging activities, there can be no assurance that we will be able to do so successfully, and our business, results of operations and financial condition could nevertheless be adversely affected by fluctuations in market rates, particularly if these conditions persist. Our financial services activities are also subject to the risk of insolvency of dealers and retail clients, as well as unfavorable economic conditions in markets where these activities are carried out. Despite our efforts to mitigate such risks through the credit approval policies applied to dealers and retail clients, there can be no assurances that we will be able to successfully mitigate such risks, particularly with respect to a general change in economic conditions. Changes in tax, tariff or fiscal policies could adversely affect demand for our products. Imposition of any additional taxes and levies designed to limit the use of automobiles could adversely affect the demand for our vehicles and our results of operations. Changes in corporate and other taxation policies as well as changes in export and other incentives given by various governments or import or tariff policies could also adversely affect our results of operations. For example, the Chinese and Indian governments have recently imposed various measures intended to curb consumption of luxury goods, including, among other things, a tax specifically applicable to the purchase of luxury cars. While we are managing our product development and production operations on a global basis to reduce costs and lead times, unique national or regional standards can result in additional costs for product development, testing, and manufacturing. Governments often require the implementation of new requirements during the middle of a product cycle, which can be substantially more expensive than accommodating these requirements during the design of a new product. The imposition of any additional taxes and levies or change in government policy designed to limit the use of high performance sports cars or automobiles more generally could also adversely affect the demand for our cars. The occurrence of the above may have a material adverse effect on our business, results of operations and financial condition. In a June 23, 2016, referendum, the United Kingdom voted to terminate the UK’s membership in the European Union (“Brexit”). As a result, negotiations are expected to take place to determine the future terms of the UK’s relationship with the European Union, including the terms of trade between the UK and the member states in the EU. Any effect of Brexit is expected to depend on the agreements, if any, that may be negotiated between the UK and the EU with respect to reciprocal market access and custom arrangements, during any transitional period and more permanently. Failure to reach appropriate agreements could adversely affect European or worldwide economic or market conditions. Approximately 9% percent of our cars and spare parts net revenues in 2017 were generated in the UK and we do not have any other significant operations in the UK, therefore, we do not believe that our global operations would be affected materially by Brexit. However, any adverse effect of Brexit on us or on global or regional economic or market conditions could adversely affect our business, results of operations and financial condition as customers may reduce or delay spending decisions on our products. We face risks associated with our international operations, including unfavorable regulatory, political, tax and labor conditions and establishing ourselves in new markets, all of which could harm our business. We currently have international operations and subsidiaries in various countries and jurisdictions in Europe, North America and Asia that are subject to the legal, political, regulatory, tax and social requirements and economic conditions in these jurisdictions. Additionally, as part of our growth strategy, we will continue to expand our sales, maintenance, and repair services internationally. However, such expansion requires us to make significant expenditures, including the establishment of local operating entities, hiring of local employees and establishing facilities in advance of generating any revenue. We are subject to a number of risks associated with international business activities that may increase our costs, impact our ability to sell our cars and require significant management attention. These risks include: • conforming our cars to various international regulatory and safety requirements where our cars are sold, or homologation; • difficulty in establishing, staffing and managing foreign operations; • difficulties attracting clients in new jurisdictions; • • foreign government taxes, regulations and permit requirements, including foreign taxes that we may not be able to offset against taxes imposed upon us in Italy; fluctuations in foreign currency exchange rates and interest rates, including risks related to any interest rate swap or other hedging activities we undertake; • our ability to enforce our contractual and intellectual property rights, especially in those foreign countries that do not respect and protect intellectual property rights to the same extent as do the United States, Japan and European countries, which increases the risk of unauthorized, and uncompensated, use of our technology; • European Union and foreign government trade restrictions, customs regulations, tariffs and price or exchange controls; 48 49 ANNUAL REPORT RISK FACTORS • • • • • foreign labor laws, regulations and restrictions; preferences of foreign nations for domestically produced cars; changes in diplomatic and trade relationships; political instability, natural disasters, war or events of terrorism; and the strength of international economies. If we fail to successfully address these risks, many of which we cannot control, our business, operating results and financial condition could be materially harmed. Improper conduct of employees, agents, or other representatives could adversely affect our reputation and our business, operating results, and financial condition. Our compliance controls, policies, and procedures may not in every instance protect us from acts committed by our employees, agents, contractors, or collaborators that would violate the laws or regulations of the jurisdictions in which we operate, including employment, foreign corrupt practices, environmental, competition, and other laws and regulations. Such improper actions could subject us to civil or criminal investigations, and monetary and injunctive penalties. In particular, our business activities may be subject to anti-corruption laws, regulations or rules of other countries in which we operate. If we fail to comply with any of these regulations, it could adversely impact our operating results and our financial condition. In addition, actual or alleged violations could damage our reputation and our ability to conduct business. Furthermore, detecting, investigating, and resolving any actual or alleged violation is expensive and can consume significant time and attention of our executive management. Our insurance coverage may not be adequate to protect us against all potential losses to which we may be subject, which could have a material adverse effect on our business. We maintain insurance coverage that we believe is adequate to cover normal risks associated with the operation of our business. However, there can be no assurance that any claim under our insurance policies will be honored fully or timely, our insurance coverage will be sufficient in any respect or our insurance premiums will not increase substantially. Accordingly, to the extent that we suffer loss or damage that is not covered by insurance or which exceeds our insurance coverage, or have to pay higher insurance premiums, our financial condition may be affected. A disruption in our information technology could compromise confidential and sensitive information. We depend on our information technology and data processing systems to operate our business, and a significant malfunction or disruption in the operation of our systems, or a security breach that compromises the confidential and sensitive information stored in those systems, could disrupt our business and adversely impact our ability to compete. Our ability to keep our business operating effectively depends on the functional and efficient operation of our information, data processing and telecommunications systems, including our car design, manufacturing, inventory tracking and billing and payment systems. We rely on these systems to enable a number of business processes and help us make a variety of day-to-day business decisions as well as to track transactions, billings, payments and inventory. Such systems are susceptible to malfunctions and interruptions due to equipment damage, power outages, and a range of other hardware, software and network problems. Those systems are also susceptible to cybercrime, or threats of intentional disruption, which are increasing in terms of sophistication and frequency, with the consequence that such cyber incidents may remain undetected for long periods of time. For any of these reasons, we may experience system malfunctions or interruptions. Although our systems are diversified, including multiple server locations and a range of software applications for different regions and functions, and we are currently undergoing an effort to assess and ameliorate risks to our systems, a significant or large scale malfunction or interruption of any one of our computer or data processing systems could adversely affect our ability to manage and keep our operations running efficiently, and damage our reputation if we are unable to track transactions and deliver products to our dealers and clients. A malfunction that results in a wider or sustained disruption to our business could have a material adverse effect on our business, results of operations and financial condition. In addition to supporting our operations, we use our systems to collect and store confidential and sensitive data, including information about our business, our clients and our employees. As our technology continues to evolve, we anticipate that we will collect and store even more data in the future, and that our systems will increasingly use remote communication features that are sensitive to both willful and unintentional security breaches. Much of our value is derived from our confidential business information, including car design, proprietary technology and trade secrets, and to the extent the confidentiality of such information is compromised, we may lose our competitive advantage and our car sales may suffer. We also collect, retain and use certain personal information, including data we gather from clients for product development and marketing purposes, and data we obtain from employees. In the event of a breach in security that allows third parties access to this personal information, we are subject to a variety of ever-changing laws on a global basis that require us to provide notification to the data owners, and that subject us to lawsuits, fines and other means of regulatory enforcement. To an increasing extent, the functionality and controls of our cars depend on in-vehicle information technology. Furthermore, such technology is capable of storing an increasing amount of personal information belonging to our customers. Any unauthorized access to in-vehicle IT systems may compromise the car security or the privacy of our customers’ information and expose us to claims as well as reputational damage. Ultimately, any significant compromise in the integrity of our data security could have a material adverse effect on our business. Risks Related to our Common Shares The market price and trading volume of our common shares may be volatile, which could result in rapid and substantial losses for our shareholders. The market price of our common shares may be highly volatile and could be subject to wide fluctuations. In addition, the trading volume of our common shares may fluctuate and cause significant price variations to occur. If the market price of our common shares declines significantly, a shareholder may be unable to sell their common shares at or above their purchase price, if at all. The market price of our common shares may fluctuate or decline significantly in the future. Some of the factors that could negatively affect the price of our common shares, or result in fluctuations in the price or trading volume of our common shares, include: • variations in our operating results, or failure to meet the market’s earnings expectations; • publication of research reports about us, the automotive industry or the luxury industry, or the failure of securities analysts to cover our common shares; 50 51 ANNUAL REPORT RISK FACTORS • departures of any members of our management team or additions or departures of other key personnel; • • • • adverse market reaction to any indebtedness we may incur or securities we may issue in the future; actions by shareholders; changes in market valuations of similar companies; changes or proposed changes in laws or regulations, or differing interpretations thereof, affecting our business, or enforcement of these laws and regulations, or announcements relating to these matters; • • • adverse publicity about the automotive industry or the luxury industry generally, or particularly scandals relating to those industries, specifically; litigation and governmental investigations; and general market and economic conditions. The loyalty voting program may affect the liquidity of our common shares and reduce our common share price. The implementation of our loyalty voting program could reduce the trading liquidity and adversely affect the trading prices of our common shares. The loyalty voting program is intended to reward our shareholders for maintaining long-term share ownership by granting initial shareholders and persons holding our common shares continuously for at least three years the option to elect to receive special voting shares. Special voting shares cannot be traded and, if common shares participating in the loyalty voting program are sold they must be deregistered from the loyalty register and any corresponding special voting shares transferred to us for no consideration (om niet). This loyalty voting program is designed to encourage a stable shareholder base and, conversely, it may deter trading by shareholders that may be interested in participating in our loyalty voting program. Therefore, the loyalty voting program may reduce liquidity in our common shares and adversely affect their trading price. The interests of our largest shareholders may differ from the interests of other shareholders. Exor N.V. (“Exor”) is our largest shareholder, holding approximately 23.5 percent of our outstanding common shares and approximately 33.4 percent of our voting power. Therefore, Exor has a significant influence over these matters submitted to a vote of our shareholders, including matters such as adoption of the annual financial statements, declarations of annual dividends, the election and removal of the members of our Board of Directors, capital increases and amendments to our articles of association. In addition, Piero Ferrari, the Vice Chairman of Ferrari, holds approximately 10 percent of our outstanding common shares and approximately 15.4 percent of voting interest in us. As a result, he also has influence in matters submitted to a vote of our shareholders. Exor and Piero Ferrari informed us that they have entered into a shareholder agreement pursuant to which they have undertaken to consult for the purpose of forming, where possible, a common view on the items on the agenda of shareholders meetings. See “Major Shareholders— Shareholders’ Agreement”. The interests of Exor and Piero Ferrari may in certain cases differ from those of other shareholders. In addition, the sale of substantial amounts of our common shares in the public market by Piero Ferrari or the perception that such a sale could occur could adversely affect the prevailing market price of the common shares. We may have potential conflicts of interest with FCA and Exor and its related companies. Questions relating to conflicts of interest may arise between us and FCA, our former largest shareholder prior to the Separation, in a number of areas relating to common shareholdings and management, as well as our past and ongoing relationships. Even after the Separation, overlaps remain among the directors and officers of us and FCA. For example, Mr. Sergio Marchionne, our Chairman and Chief Executive Officer, is the Chief Executive Officer of FCA. Mr. Marchionne and certain of our other directors and officers may also be directors or officers of FCA or Exor, our and FCA’s largest shareholder, including Mr. John Elkann, who is one of our Vice-Chairmen, the Chairman of FCA and the Chairman and Chief Executive Officer of Exor. These individuals owe duties both to us and to the other companies that they serve as officers and/or directors. This may raise conflicts as, for example, these individuals review opportunities that may be appropriate or suitable for both us and such other companies, or we pursue business transactions in which both we and such other companies have an interest, such as our arrangement to supply engines for Maserati cars. Exor holds approximately 23.5 percent of our outstanding common shares and approximately 33.4 percent of the voting power in us, while it holds approximately 29.2 percent of the outstanding common shares and approximately 43.1 percent of the voting power in FCA. Exor also owns a controlling interest in CNH Industrial N.V., which was part of the FCA group before its spin-off several years ago. These ownership interests could create actual, perceived or potential conflicts of interest when these parties or our common directors and officers are faced with decisions that could have different implications for us and FCA or Exor, as applicable. Our loyalty voting program may make it more difficult for shareholders to acquire a controlling interest in Ferrari, change our management or strategy or otherwise exercise influence over us, which may affect the market price of our common shares. The provisions of our articles of association which establish the loyalty voting program may make it more difficult for a third party to acquire, or attempt to acquire, control of our company, even if a change of control were considered favorably by shareholders holding a majority of our common shares. As a result of the loyalty voting program, a relatively large proportion of the voting power of Ferrari could be concentrated in a relatively small number of shareholders who would have significant influence over us. Exor has approximately 23.5 percent of our outstanding common shares and a voting interest in Ferrari of approximately 33.4 percent. Piero Ferrari holds approximately 10 percent of our outstanding common shares and, as a result of the loyalty voting mechanism, has approximately 15.4 percent of the voting power in our shares. In addition, Exor and Piero Ferrari informed us that they have entered into a shareholder agreement, summarized under “Major Shareholders—Shareholders’ Agreement”. As a result, Exor and Piero Ferrari may exercise significant influence on matters involving our shareholders. Exor and Piero Ferrari and other shareholders participating in the loyalty voting program may have the power effectively to prevent or delay change of control or other transactions that may otherwise benefit our shareholders. The loyalty voting program may also prevent or discourage shareholder initiatives aimed at changing Ferrari’s management or strategy or otherwise exerting influence over Ferrari. See “Corporate Governance - Loyalty Voting Structure”. 52 53 ANNUAL REPORT RISK FACTORS We are a Dutch public company with limited liability, and our shareholders may have rights different to those of shareholders of companies organized in the United States. The rights of our shareholders may be different from the rights of shareholders governed by the laws of U.S. jurisdictions. We are a Dutch public company with limited liability (naamloze vennootschap). Our corporate affairs are governed by our articles of association and by the laws governing companies incorporated in the Netherlands. The rights of shareholders and the responsibilities of members of board of directors may be different from the rights of shareholders and the responsibilities of members of our board of directors in companies governed by the laws of other jurisdictions including the United States. In the performance of its duties, our board of directors is required by Dutch law to consider our interests and the interests of our shareholders, our employees and other stakeholders, in all cases with due observation of the principles of reasonableness and fairness. It is possible that some of these parties will have interests that are different from, or in addition to, your interests as a shareholder. We expect to maintain our status as a “foreign private issuer” under the rules and regulations of the SEC and, thus, are exempt from a number of rules under the Exchange Act of 1934 and are permitted to file less information with the SEC than a company incorporated in the United States. As a “foreign private issuer,” we are exempt from rules under the Securities Exchange Act of 1934, as amended (“the Exchange Act”) that impose certain disclosure and procedural requirements for proxy solicitations under Section 14 of the Exchange Act. In addition, our officers, directors and principal shareholders are exempt from the reporting and “short-swing” profit recovery provisions of Section 16 of the Exchange Act and the rules under the Exchange Act with respect to their purchases and sales of our common shares. Moreover, we are not required to file periodic reports and financial statements with the SEC as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act, nor are we required to comply with Regulation FD, which restricts the selective disclosure of material information. Accordingly, there may be less publicly available information concerning us than there is for U.S. public companies. Our ability to pay dividends on our common shares may be limited and the level of future dividends is subject to change. Our payment of dividends on our common shares in the future will be subject to business conditions, financial conditions, earnings, cash balances, commitments, strategic plans and other factors that our Board of Directors may deem relevant at the time it recommends approval of the dividend. Our dividend policy is subject to change in the future based on changes in statutory requirements, market trends, strategic developments, capital requirements and a number of other factors. In addition, under our articles of association and Dutch law, dividends may be declared on our common shares only if the amount of equity exceeds the paid up and called up capital plus the reserves that have to be maintained pursuant to Dutch law or the articles of association. Further, even if we are permitted under our articles of association and Dutch law to pay cash dividends on our common shares, we may not have sufficient cash to pay dividends in cash on our common shares. Our maintenance of two exchange listings may adversely affect liquidity in the market for our common shares and could result in pricing differentials of our common shares between the two exchanges. Our shares are listed on both the NYSE and the Mercato Telematico Azionario (“MTA”). The dual listing of our common shares may split trading between the NYSE and the MTA, adversely affect the liquidity of the shares and the development of an active trading market for our common shares in one or both markets and may result in price differentials between the exchanges. Differences in the trading schedules, as well as volatility in the exchange rate of the two trading currencies, among other factors, may result in different trading prices for our common shares on the two exchanges. It may be difficult to enforce U.S. judgments against us. We are organized under the laws of the Netherlands, and a substantial portion of our assets are outside of the United States. Most of our directors and senior management and our independent auditors are resident outside the United States, and all or a substantial portion of their respective assets may be located outside the United States. As a result, it may be difficult for U.S. investors to effect service of process within the United States upon these persons. It may also be difficult for U.S. investors to enforce within the United States judgments against us predicated upon the civil liability provisions of the securities laws of the United States or any state thereof. In addition, there is uncertainty as to whether the courts outside the United States would recognize or enforce judgments of U.S. courts obtained against us or our directors and officers predicated upon the civil liability provisions of the securities laws of the United States or any state thereof. Therefore, it may be difficult to enforce U.S. judgments against us, our directors and officers and our independent auditors. FCA creditors may seek to hold us liable for certain FCA obligations. One step of our Separation from FCA included a demerger from FCA of our common shares previously held by it. In connection with a demerger under Dutch law, the demerged company may continue to be liable for certain obligations of the demerging company that exist at the time of the demerger, but only to the extent that the demerging company fails to satisfy such liabilities. Based on other actions taken as part of the Separation, we do not believe we retain any liability for obligations of FCA existing at the time of the Separation. Nevertheless, in the event that FCA fails to satisfy obligations to its creditors existing at the time of the demerger, it is possible that those creditors may seek to recover from us, claiming that we remain liable to satisfy such obligations. While we believe we would prevail against any such claim, litigation is inherently costly and uncertain and could have an adverse effect. See “Overview - History of the Company”. Risks Related to Taxation Changes to taxation or the interpretation or application of tax laws could have an adverse impact on our results of operations and financial condition. Our business is subject to various taxes in different jurisdictions (mainly Italy), which include, among others, the Italian corporate income tax (“IRES”), regional trade tax (“IRAP”), value added tax (“VAT”), excise duty, registration tax and other indirect taxes. We are exposed to the risk that our overall tax burden may increase in the future. Changes in tax laws or regulations or in the position of the relevant Italian and non-Italian authorities regarding the application, administration or interpretation of these laws or regulations, particularly if applied retrospectively, could have negative effects on our current business model and have a material adverse effect on our business, operating results and financial condition. In order to reduce future potential disputes with tax authorities, we seek advance agreements with tax 54 55 ANNUAL REPORTRISK FACTORS authorities on significant matters. In particular we filed a ruling application for advance pricing agreement (APA) on transfer pricing and a so called “interpello nuovi investimenti” (tax ruling on new investments) regarding tax credit on R&D expenses to confirm our interpretation and application of the law. In addition, tax laws are complex and subject to subjective valuations and interpretive decisions, and we will periodically be subject to tax audits aimed at assessing our compliance with direct and indirect taxes. The tax authorities may not agree with our interpretations of, or the positions we have taken or intend to take on, tax laws applicable to our ordinary activities and extraordinary transactions. In case of challenges by the tax authorities to our interpretations, we could face long tax proceedings that could result in the payment of penalties and have a material adverse effect on our operating results, business and financial condition. As a result of the demergers and the merger in connection with the Separation, we might be jointly and severally liable with FCA for certain tax liabilities arisen in the hands of FCA. Although the Italian tax authorities confirmed in a positive advance tax ruling issued on October 9, 2015 that the demergers and the Merger that was carried out in connection with the Separation would be respected as tax-free, neutral transactions from an Italian income tax perspective, under Italian tax law we may still be held jointly and severally liable, as a result of the combined application of the rules governing the allocation of tax liabilities in case of demergers and mergers, with FCA for taxes, penalties, interest and any other tax liability arising in the actions of FCA because of violations of its tax obligations related to tax years prior to the two Demergers described in the section “Overview - History of the Company.” There may be potential “Passive Foreign Investment Company” tax considerations for U.S. holders. Shares of our stock would be stock of a “passive foreign investment company,” or a PFIC, for U.S. federal income tax purposes with respect to a U.S. holder if for any taxable year in which such U.S. holder held shares of our stock, after the application of applicable “look-through rules” (i) 75 percent or more of our gross income for the taxable year consists of “passive income” (including dividends, interest, gains from the sale or exchange of investment property and rents and royalties other than rents and royalties which are received from unrelated parties in connection with the active conduct of a trade or business, as defined in applicable Treasury Regulations), or (ii) at least 50 percent of our assets for the taxable year (averaged over the year and determined based upon value) produce or are held for the production of “passive income”. U.S. persons who own shares of a PFIC are subject to a disadvantageous U.S. federal income tax regime with respect to the income derived by the PFIC, the dividends they receive from the PFIC, and the gain, if any, they derive from the sale or other disposition of their shares in the PFIC. While we believe that shares of our stock are not stock of a PFIC for U.S. federal income tax purposes, this conclusion is based on a factual determination made annually and thus is subject to change. Moreover, our common shares may become stock of a PFIC in future taxable years if there were to be changes in our assets, income or operations. The consequences of the loyalty voting program are uncertain. No statutory, judicial or administrative authority directly discusses how the receipt, ownership, or disposition of special voting shares should be treated for Italian or U.S. tax purposes and as a result, the tax consequences in those jurisdictions are uncertain. The fair market value of the special voting shares, which may be relevant to the tax consequences, is a factual determination and is not governed by any guidance that directly addresses such a situation. Because, among other things, our special voting shares are not transferable (other than, in very limited circumstances, together with the associated common shares) and a shareholder will receive amounts in respect of the special voting shares only if we are liquidated, we believe and intend to take the position that the fair market value of each special voting share is minimal. However, the relevant tax authorities could assert that the value of the special voting shares as determined by us is incorrect. The tax treatment of the loyalty voting program is unclear and shareholders are urged to consult their tax advisors in respect of the consequences of acquiring, owning and disposing of special voting shares. We currently benefit or seek to benefit from certain special tax regimes, which may not be available in the future. We currently calculate taxes due in Italy based, among other things, on certain tax breaks recognized by Italian Tax regulations for R&D expenses (available until fiscal year 2021 according to current regulations) and for the investments on manufacturing equipment (available until fiscal year 2018 according to current regulations), which result in a significant tax saving. A change in regulations or interpretation might adversely affect the availability of such exemptions and result in higher tax charges. Italian Law No. 190 of December 2014, as subsequently amended and supplemented (Finance Act 2015) introduced an optional patent box regime in the Italian tax system. The patent box regime is a tax exemption related to, inter alia, the use of intellectual property assets. Business income derived from the use of each qualified intangible asset is partially exempted from taxation for both IRES and IRAP purposes. The application of such patent box regime may reduce our tax expenses and we are currently seeking to avail ourselves of such regime. However, this exemption is subject to a mandatory ruling by the Italian tax authorities and the outcome of the ruling procedure is not certain. We have filed a ruling application, but we are currently awaiting a response from the Italian tax authorities. In the event of a negative response from the Italian tax authorities, we will not be able to benefit from such exemption. 56 57 ANNUAL REPORT OVERVIEW Ferrari is among the world’s leading luxury brands focused on the design, engineering, production and sale of the world’s most recognizable luxury performance sports cars. Our brand symbolizes exclusivity, innovation, state-of-the-art sporting performance and Italian design and engineering heritage. Our name and history and the image enjoyed by our cars are closely associated with our Formula 1 racing team, Scuderia Ferrari, the most successful team in Formula 1 history. From the inaugural year of Formula 1 in 1950 through the present, Scuderia Ferrari has won 229 Grand Prix races, 16 Constructor World titles and 15 Drivers’ World titles. We believe our history of excellence, technological innovation and defining style transcends the automotive industry, and is the foundation of the Ferrari brand and image. We design, engineer and produce our cars in Maranello, Italy, and sell them in over 60 markets worldwide through a network of 164 authorized dealers operating 185 points of sale. We believe our cars are the epitome of performance, luxury and styling. Our current product range consists of six range models, including three sports cars (488 GTB, 488 Spider and 812 Superfast) and three GT cars (GTC4Lusso, GTC4Lusso T and California T), one special series car (F12tdf) and one limited edition supercar (LaFerrari Aperta). We also produce very limited editions series (fuori serie) and one-off cars. The 812 Superfast was launched in February 2017 and the Ferrari Portofino, which is the successor of the California T (which is being phased out), was unveiled in September 2017 with shipments expected to begin in the second quarter of 2018. The LaFerrari Aperta was unveiled in September 2016 to celebrate our 70th anniversary in 2017. In 2017, we shipped 8,398 cars and recorded net revenues of €3,417 million, EBIT of €775 million, net profit of €537 million, and earnings before interest, taxes, depreciation, and amortization (EBITDA) of €1,036 million. For additional information regarding EBITDA, which is a non-GAAP measure, including a reconciliation of EBITDA to net profit, see “Operating Results—Non-GAAP Financial Measures.” We divide our regional markets into EMEA, Americas, China, Hong Kong and Taiwan (on a combined basis) and Rest of APAC, representing respectively 44.5 percent, 33.5 percent, 7.3 percent and 14.7 percent of units shipped in 2017. History of the Company Ferrari was incorporated as a public limited liability company (naamloze vennootschap) under the laws of the Netherlands on September 4, 2015 with an indefinite duration. Our corporate seat (statutaire zetel) is in Amsterdam, the Netherlands, and our registered office and principal place of business is located at Via Abetone Inferiore n. 4, I-41053 Maranello (MO), Italy. Ferrari is registered with the Dutch Trade Register of the Chamber of Commerce under number 64060977. Its telephone number is +39-0536-949111. The name and address of the Company’s agent in the United States is: Ferrari North America, Inc., 50 Sylvan Avenue, Englewood Cliffs, NJ 07632. Its telephone number is +1 (201) 816 2600. Our company is named after our founder Enzo Ferrari. An Alfa Romeo driver since 1924, Enzo Ferrari founded his own racing team, Scuderia Ferrari, in Modena in 1929 initially to race Alfa Romeo cars. In 1939 he set up his own company, initially called Auto Avio Costruzioni. In late 1943, Enzo Ferrari moved his headquarters from Modena to Maranello, which remains our headquarters to this day. In 1947, we produced our first racing car, the 125 S. The 125 S’s powerful 12 cylinder engine would go on to become synonymous with the Ferrari brand. In 1948, the first road car, the Ferrari 166 Inter, was produced. Styling quickly became an integral part of the Ferrari brand. In 1950, we began our participation in the Formula 1 World Championship, racing in the world’s second Grand Prix in Monaco, which makes Scuderia Ferrari the longest running Formula 1 team. We won our first Constructor World Title in 1952. Our success on the world’s tracks and roads extends beyond Formula 1, including victories in some of the most important car races such as the 24 Hours of Le Mans, the world’s oldest endurance automobile race, and the 24 Hours of Daytona. The Fiat group acquired a 50 percent stake in Ferrari S.p.A. in 1969, which increased to 90 percent in 1988, after the death of Enzo Ferrari, with the remaining 10 percent held by Enzo Ferrari’s son, Piero Ferrari. On October 29, 2014, FCA announced the intention to separate Ferrari S.p.A. from FCA (the “Separation”). The Separation was completed on January 3, 2016 through a series of transactions which are summarized below. On October 19, 2015 we completed a restructuring intended to facilitate the initial public offering of our shares (the “IPO”) which resulted in the establishment of New Business Netherlands N.V., then renamed Ferrari N.V. (“Predecessor Ferrari”) as the holding company of the Ferrari group holding a 100 percent interest in Ferrari S.p.A. Predecessor Ferrari was originally established as a 100 percent owned subsidiary of FCA on May 24, 2013. As a result of the restructuring, immediately prior to the IPO, FCA held approximately 90 percent of Predecessor Ferrari common shares and special voting shares and Piero Ferrari, the son of our founder, held the remainder of Predecessor Ferrari common shares and special voting shares. As part of the restructuring, Predecessor Ferrari incurred debt in order to optimize the capital structure of Predecessor Ferrari as a public company through the issue by Predecessor Ferrari to FCA of a promissory note (the “FCA Note”). On October 20, 2015, FCA priced an IPO of shares of Predecessor Ferrari shares representing approximately 10 percent of Predecessor Ferrari’s common share capital and, on October 21, 2015, such common shares started trading on the New York Stock Exchange under the ticker symbol “RACE”. Following completion of the IPO, FCA owned approximately 80 percent of Predecessor Ferrari common shares, Piero Ferrari held approximately 10 percent of Predecessor Ferrari common shares and investors in the IPO held approximately 10 percent of Predecessor Ferrari common shares. On December 16, 2015, Ferrari repaid the FCA Note with the proceeds of a loan drawn under a syndicated credit facility with a group of lenders. The remaining steps of the Separation were carried out through the following transactions, which occurred between January 1 and January 3, 2016. Through two consecutive demergers under Dutch law (the “Demergers”), the equity interests in Predecessor Ferrari previously held by FCA, corresponding to approximately 80 percent of Predecessor Ferrari common share capital, were transferred to holders of FCA common shares and FCA mandatory convertible securities (“MCS”). Immediately after the Demergers, Predecessor Ferrari merged with and into Ferrari, as surviving company (the “Merger”). Upon effectiveness of the Merger, Ferrari became the holding company of the Ferrari business. On January 4, 2016 the Company also completed the listing of its common shares on the Mercato Telematico Azionario, the stock exchange managed by Borsa Italiana, under the ticker symbol RACE. 58 59 ANNUAL REPORT INDUSTRY OVERVIEW Luxury performance cars share several characteristics with other luxury goods such as quality, aesthetics, rarity, exclusivity and a high degree of non-functional associations all of which leads to significantly higher pricing as compared to mass market goods within the same category. While affected by global macroeconomic conditions, the luxury goods market is also impacted by several more specific factors, such as, in recent years, the significant economic growth and wealth creation in certain emerging economies and rising levels of affluence and demand from the emerging middle and upper classes in Asia and a general trend towards urbanization. Particularly following the 2008-2009 downturn, this has led the global luxury goods market to return to outperform global GDP. ) h t w o r G e v i t a l e R ( 340 320 300 280 260 240 220 200 180 160 140 120 100 80 5 9 9 1 6 9 9 1 7 9 9 1 8 9 9 1 9 9 9 1 0 0 0 2 1 0 0 2 2 0 0 2 3 0 0 2 4 0 0 2 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 0 1 0 2 1 1 0 2 2 1 0 2 3 1 0 2 4 1 0 2 5 1 0 2 6 1 0 2 Global Personal-Luxury-Goods Market Global GDP Source: Bain & Company Within the luxury goods market, we define our target market for luxury performance cars as two-door cars powered by engines producing more than 500 hp and selling at a retail price in excess of Euro 150,000 (including VAT). The luxury performance car market historically has followed relatively closely growth patterns in the broader luxury market. The luxury performance car market is generally affected by global macroeconomic conditions and, although we and certain other manufacturers have proven relatively resilient, general downturns can have a disproportionate impact on sales of luxury goods in light of the discretionary nature of consumer spending in this market. Furthermore, because of the emotional nature of the purchasing decision, economic confidence and factors such as expectations regarding future income streams as well as the social acceptability of luxury goods may impact sales. Following the sharp recession of 2008-2009, the luxury performance car market has been resilient to further economic downturns and stagnation in the broader economy, also a result of the increase of new product launches. A sustained period of wealth creation in several Asian countries and, to a lesser extent, in the Americas, has led to an expanding population of potential consumers of luxury goods. Developing consumer preferences in the Asian markets, where the newly affluent are increasingly embracing western brands of luxury products, have also led to higher demand for cars in our segment, which are all produced by established European manufacturers. Additionally, the growing appetite of younger affluent purchasers for luxury performance cars has led to new entrants, which in turn has resulted in higher sales overall in the market. Unlike in other segments of the broader luxury market, however, in the luxury performance car market, a significant portion of demand is driven by new product launches. The market share of individual producers fluctuates over time reflecting the timing of product launches. New launches tend to drive sales volumes even in difficult market environments because the novelty, exclusivity and excitement of a new product is capable of creating and capturing its own demand from clients. UNITS 8.000 7.000 6.000 5.000 4.000 3.000 2.000 1.000 0 I R A R R E F UNITS 34.000 29.000 24.000 19.000 14.000 4 0 0 2 , 1 3 . c e D 5 0 0 2 , 1 3 . c e D 6 0 0 2 , 1 3 . c e D 7 0 0 2 , 1 3 . c e D 8 0 0 2 , 1 3 . c e D 9 0 0 2 , 1 3 . c e D 0 1 0 2 , 1 3 . c e D 1 1 0 2 , 1 3 . c e D 2 1 0 2 , 1 3 . c e D 3 1 0 2 , 1 3 . c e D 4 1 0 2 , 1 3 . c e D 5 1 0 2 , 1 3 . c e D 6 1 0 2 , 1 3 . c e D 7 1 0 2 , 1 3 . c e D FERRARI LUXURY PERFORMANCE CAR INDUSTRY Y R T S U D N I R A C E C N A M R O F R E P Y R U X U L • • Data for the Luxury Performance Car Industry include all two door GT and Sports Cars with power above 500hp, and retail price above Euro 150,000 (including VAT) sold by Aston Martin, Audi, Bentley, Ferrari, Ford, Honda/Acura, Lamborghini, McLaren, Mercedes Benz, Porsche and Rolls-Royce. Ferrari data based on the 22 top countries (excluding Middle East countries) for Ferrari annual registrations and sales (which accounted for approximately 85% of the total Ferrari shipments in 2017). • Data for the Luxury Performance Car Industry based on units registered (in Brazil, Japan, Taiwan, United Kingdom, Germany, France, Switzerland, Italy, Spain, Sweden, Netherlands, Belgium and Austria) or sold (in USA, South Korea, Thailand, China, Hong Kong, Australia, New Zealand, Singapore and Indonesia). Source: USA: US Maker Data Club, Brazil-JATO; Austria-OSZ; Belgium-FEBIAC; France-SIV; Germany-KBA; UKSMMT; Italy-UNRAE; Netherlands- VWE; Spain- TRAFICO; Sweden-BranschData; Switzerland-ASTRA; China-China Automobile Industry Association-DataClub; Hong Kong-Hong Kong Motor Trader Association; Taiwan-Ministry of Transportation and Communications; Australia-VFACTS-S; Japan-JAIA; Indonesia-GAIKINDO; New Zealand-VFACTS; Singapore-LTA, MTA (Land Transport Authority, Motor Trader Associations); South Korea-KAIDA; Thailand -Department of Land Transportation. The luxury performance car market has now exceeded pre-crisis levels. As shown in the chart above, our volumes in recent years have proven less volatile than our competitors. We believe this is due to our strategy of maintaining low volumes compared to demand, as well as the higher number of models in our range and our more frequent product launches compared to our competitors. In 2017, our volumes in the largest 22 markets were substantially in line with 2016, primarily driven by contribution from our range models. We had a market share of 20 percent in the luxury performance car market; with a 22 percent of market share in the sports car segment and 16 percent of market share in the GT segment. The chart below sets forth our market shares in 2017 in our largest 22 markets by geographical area. 60 61 ANNUAL REPORT successor of the California T which is being phased out), the GTC4Lusso and the GTC4Lusso T models and our principal competitors are Rolls-Royce (Wraith and Dawn), Bentley (Continental GT/GTC, V12 and V8, Speed and S version, GT3-R and Supersports), Aston Martin (DB11 Coupé and Spider, V8 and V12) and Mercedes (S Coupé and Convertible 63/65 AMG, AMG ATC Coupé and Spider and AMG GTR). In recent years, the market has shifted somewhat with an increased focus on the GT segment and the lower priced range of the sports car market, with larger automotive groups expanding their offering of premium cars to enter the luxury performance car market. Competition in the luxury performance car market is driven by the strength of the brand and the appeal of the products in terms of performance, styling, novelty and innovation as well as on the manufacturers’ ability to renew its product offerings regularly in order to continue to stimulate customer demand. Larger automotive groups with a product offering in the luxury performance car market typically have larger financial resources compared to the small luxury car producers and therefore may have more flexibility in planning for product launches and capital spending over time. Competition among similarly positioned luxury performance cars is also driven by price and total cost of ownership. We believe that the resilience of the value of our cars after a period of ownership is an important competitive factor because it decreases the total cost of ownership for our clients and promotes repeat purchases. INDUSTRY OVERVIEW TOP22 MKTs EUROPE AMERICAS CHINA, HONG KONG AND TAIWAN (on a combined basis) REST OF APAC 20% 23% 18% 19% 26% 25% 80% 82% 81% 74% 75% Ferrari market leader in Belgium, France, Italy and Switzerland Ferrari market leader in USA Ferrari market leader in China, Hong Kong and Taiwan (on a combined basis) Ferrari market leader in Japan, Australia, Indonesia, Singapore, Thailand 20% 80% 18% 82% 19% 81% 26% 74% 25% 75% • Data for the Luxury Performance Car Industry include all two door GT and sports cars with power above 500hp, and retail price above Euro 150,000 • (including VAT) sold by Aston Martin, Audi, Bentley, Ferrari, Ford, Lamborghini, McLaren, Mercedes Benz, Porsche and Rolls-Royce. Ferrari data based on the 22 top countries (excluding Middle East countries) for Ferrari annual registrations and sales (which accounted for approximately 85% of the total Ferrari shipments in 2017). • Data for the Luxury Performance Car Industry based on units registered (Brazil, Japan, Taiwan, United Kingdom, Germany, France, Switzerland, Italy, Spain, Sweden, Netherlands, Belgium and Austria) or sold (in USA, South Korea, Thailand, China, Hong Kong, Australia, New Zealand, Singapore and Indonesia). Source: USA: US Maker Data Club, Brazil-JATO; Austria-OSZ; Belgium-FEBIAC; France-SIV; Germany-KBA; UK-SMMT; Italy- UNRAE; Netherlands- VWE; Spain- TRAFICO; Sweden-BranschData; Switzerland-ASTRA; China-China Automobile Industry Association-DataClub; Hong Kong-Hong Kong Motor Trader Association; Taiwan-Ministry of Transportation and Communications; Australia-VFACTS-S; Japan-JAIA; Indonesia- GAIKINDO; New Zealand-VFACTS; Singapore-LTA, MTA (Land Transport Authority, Motor Trader Associations); South Korea-KAIDA; Thailand - Department of Land Transportation. While we monitor our market share as an indicator of our brand appeal, we do not regard market share in the luxury performance market as particularly relevant as compared to other segments of the automotive industry. We are not focused on market share as a performance metric. Instead, we deliberately manage our supply relative to demand, to defend and promote our brand exclusivity and premium pricing. In recent years, we have produced a substantially constant number of cars per year in furtherance of that strategy. Competition Competition in the luxury performance car market is concentrated in a fairly small number of producers, including both large automotive companies as well as small producers exclusively focused on luxury cars, like us. The luxury performance car market includes a sports car segment and a GT segment. In the sports car segment our products are the 488 GTB, 488 Spider, 812 Superfast and our latest special series, the F12tdf, and our principal competitors are Lamborghini (Huracán 4WD/2WD, Aventador, Aventador SV, in each case Coupé and Spider, and Huracán Performante), McLaren (570S/GT, 540C, 720S Coupé and Spider), Ford (GT), Honda (NSX), Porsche (911 Turbo, Turbo S, both Coupé and Spider), Mercedes (SL 63/65 AMG), Aston Martin (Vanquish and V12 Vantage/S, both Coupé and Spider), Audi (R8 V10 Coupé and Spider, R8V10 Plus and R8V10 RWS). In the GT segment our products are the California T, the Ferrari Portofino (the 62 63 ANNUAL REPORT OVERVIEW OF OUR BUSINESS Ferrari is among the world’s leading luxury brands focused on the design, engineering, production and sale of the world’s most recognizable luxury performance sports cars. Our brand symbolizes exclusivity, innovation, state-of-the-art sporting performance and Italian design and engineering heritage. Our name and history and the image enjoyed by our cars are closely associated with our Formula 1 racing team, Scuderia Ferrari, the most successful team in Formula 1 history. From the inaugural year of Formula 1 in 1950 through the present, Scuderia Ferrari has won 229 Grand Prix races, 16 Constructor World titles and 15 Drivers’ World titles. We believe our history of excellence, technological innovation and defining style transcends the automotive industry, and is the foundation of the Ferrari brand and image. We design, engineer and produce our cars in Maranello, Italy, and sell them in over 60 markets worldwide through a network of 164 authorized dealers operating 185 points of sale. We believe our cars are the epitome of performance, luxury and styling. Our current product range consists of six range models, including three sports cars (488 GTB, 488 Spider and 812 Superfast) and three GT cars (GTC4Lusso, GTC4Lusso T and California T), one special series car (F12tdf) and one limited edition supercar (LaFerrari Aperta). We also produce very limited editions series (fuoriserie) and one-off cars. The 812 Superfast was launched in February 2017 and the Ferrari Portofino, which is the successor of the California T (which is being phased out), was unveiled in September 2017 with shipments expected to begin in the second quarter of 2018. The LaFerrari Aperta was unveiled in September 2016 to celebrate our 70th anniversary in 2017. In 2017, we shipped 8,398 cars and recorded net revenues of €3,417 million, EBIT of €775 million, net profit of €537 million, and earnings before interest, taxes, depreciation, and amortization (EBITDA) of €1,036 million. For additional information regarding EBITDA, which is a non-GAAP measure, including a reconciliation of EBITDA to net profit, see “Operating Results—Non-GAAP Financial Measures.” We pursue a low volume production strategy whilst broadening our product portfolio to target a larger customer base in order to maintain a reputation of exclusivity and scarcity among purchasers of our cars and carefully manage our production volumes and delivery waiting lists to promote this reputation. We divide our regional markets into EMEA, Americas, China, Hong Kong and Taiwan (on a combined basis) and Rest of APAC, representing respectively 44.5 percent, 33.5 percent, 7.3 percent and 14.7 percent of units shipped in 2017. We license the Ferrari brand to a selected number of producers and retailers of luxury and lifestyle goods. In addition, we design, source and sell Ferrari-branded products through a network of 18 Ferrari-owned stores and 30 franchised stores (including 8 Ferrari Store Junior), as well as on our website. As one of the world’s most recognized premium luxury brands, we believe we are well positioned to selectively expand the presence of the Ferrari brand in attractive and growing lifestyle categories consistent with our image, including sportswear, watches, accessories, consumer electronics and theme parks which we believe enhance the brand experience of our loyal following of clients and Ferrari enthusiasts. We focus our marketing and promotion efforts in the investments we make in our racing activities, in particular Scuderia Ferrari’s participation in the Formula 1 World Championship, which is one of the most watched annual sports series in the world, with over 350 million television viewers in 2017 (Source: FOM/Kantar Media 2017). Although our most recent Formula 1 world title was in 2008, we are enhancing our focus on Formula 1 activities with the goal of improving recent racing results and restoring our historical position as the premier racing team in Formula 1. We believe that these activities support the strength and awareness of our brand among motor enthusiasts, clients and the general public. We will continue focusing our efforts on protecting and enhancing the value of our brand to preserve our strong financial profile and participate in the premium luxury market growth. We intend to selectively pursue controlled and profitable growth in existing and emerging markets while expanding the Ferrari brand to carefully selected lifestyle categories. Sports and GT Cars Our current product range includes six range models and one special series, equipped with either eight or twelve cylinder engines and divided into two classes: Sports cars and GT cars. We target end clients seeking high performance cars with distinctive design and state of the art technology. Within these parameters, we offer different models to meet our clients’ varying needs and to differentiate our line-up from that of other manufacturers, ranging from the exceptional performance of our Sports cars to the luxury and drivability of our GT cars. Our diversified product offering includes different architectures (such as front-engine and mid-rear engine), engine sizes (V8 and V12), body styles (such as coupes and spiders), and seating (2 seaters, 2+2 seaters and 4 seaters). Our sports cars are characterized by compact bodies, a design guided by performance and aerodynamics, and often benefit from technologies initially developed for our Formula 1 single-seaters. They favor performance over comfort, seeking to provide a driver with an immediate response and superior handling, leveraging state of the art vehicle dynamics components and controls. In our sports car class, we offer three models: two of which are equipped with mid-rear V8 engines, namely the 488 GTB (with 670 hp) and the 488 Spider (with 670 hp); and one equipped with a front V12 engine, the 812 Superfast (with 800 hp). Our GT cars, while maintaining the performance expected of a Ferrari, are characterized by more refined interiors with a higher focus on comfort and quality of life on-board. In our GT class, we offer two models equipped with our V8 engine, the California T (with 560 hp) and the GTC4Lusso T (with 610 hp), the first Ferrari 4 seater equipped with a V8 turbo engine. We also offer one GT model equipped with our V12 engine, the GTC4Lusso (with 690 hp), our sport-luxury 4 seater and 4 wheel drive. The Ferrari Portofino (with 600 hp), the replacement of the California T, was unveiled in September 2017 and shipments are expected to begin in the second quarter of 2018. We also from time to time design, engineer and produce special series cars which are based on our range models but introduce novel product concepts. These cars are characterized by significant hardware and software mechanical modifications designed to enhance performance and drivability. Our special series cars are particularly targeted to collectors and, from a commercial and product development standpoint, they facilitate the transition from existing to new range models. Our current special series model is the F12tdf, equipped with a V12 engine with 780 hp. In addition to our range models and special series described above, we also continue the longstanding Ferrari tradition of limited edition supercars, very limited series (fuori serie) and one-off cars. Our limited edition supercars, which we typically launch in seven to 10 year intervals, are the highest expression of Ferrari performance and are often the forerunners of technological innovations for the future range models, with innovative features and futuristic design. At the Mondial de l’Automobile 2016 show in Paris we introduced an open top version of the LaFerrari, LaFerrari Aperta, to celebrate the 70th anniversary of Ferrari in 2017. Our fuori serie cars can be based on range or special series mechanical components, but are characterized by important exterior body modifications resulting in an innovative product by concept or design. These exclusive cars are linked to specific events or celebrations, such as the F60 America (celebrating our 60th anniversary of sales in the United States) and the J50 (celebrating our 50th anniversary of sales in Japan). Our one-off cars are designed to meet the varying 64 65 ANNUAL REPORT OVERVIEW OF OUR BUSINESS needs of our most loyal and discerning clients. They reflect the exact design and specifications required by our clients and are produced as a single, unique vehicle. (See “-Limited Edition Supercars, Fuori Serie and One-Offs”). The table below sets forth our unit shipments for the years ended December 31, 2017, 2016 and 2015, by geographic market: (Number of cars and % of total cars) EMEA UK Germany Italy France Switzerland Middle East (1) Other EMEA(2) Total EMEA Americas(3) China, Hong Kong and Taiwan (on a combined basis) Rest of APAC(4) Total 2017 843 710 417 346 339 331 751 3,737 2,811 617 1,233 8,398 For the years ended December 31, % 2016 % 10.0% 8.5% 5.0% 4.1% 4.0% 3.9% 9.0% 44.5% 33.5% 7.3% 14.7% 100.0% 769 675 364 306 333 439 724 3,610 2,687 619 1,098 8,014 9.6% 8.4% 4.5% 3.8% 4.2% 5.5% 9.1% 45.1% 33.5% 7.7% 13.7% 100.0% 2015 % 740 595 285 274 340 456 661 3,351 2,640 610 1,063 7,664 9.7% 7.8% 3.7% 3.6% 4.4% 5.9% 8.6% 43.7% 34.4% 8.0% 13.9% 100.0% (1) Middle East includes the United Arab Emirates, Saudi Arabia, Bahrain, Lebanon, Qatar, Oman and Kuwait. (2) Rest of EMEA includes Africa and the other European markets not separately identified. (3) Americas includes the United States of America, Canada, Mexico, the Caribbean and Central and South America. (4) Rest of APAC mainly includes Japan, Australia, Singapore, Indonesia and South Korea. The table below sets forth our unit shipments for the years ended December 31, 2017, 2016 and 2015, with a breakdown of Sports and GT cars: (Number of cars) Sports V8(1) V12(2) Total Sports GT V8 V12 Total GT TOTAL For the years ended December 31, 2017 2016 2015 4,845 998 5,843 1,619 936 2,555 8,398 4,221 1,152 5,373 2,247 394 2,641 8,014 3,534 1,169 4,703 2,638 323 2,961 7,664 (1) (2) Includes 458 Speciale and 458 Speciale A for 2015. Includes the F12berlinetta for all periods presented, the LaFerrari until 2016, and from the third quarter of 2016 the LaFerrari Aperta. We are also actively engaged in after sales activities driven, among other things, by the objective of preserving and extending the market value of the cars we sell. We believe our cars’ performance in terms of value preservation after a period of ownership significantly exceeds that of any other brand in the luxury car segment. High residual value is important to the primary market because clients, when purchasing our cars, take into account the expected resale value of the car in assessing the overall cost of ownership. Furthermore, a higher residual value potentially lowers the cost for the owner to switch to a new model thereby supporting client loyalty and promoting repeat purchases. Range Models and Special Series Our products include the range models and special series described below. Our range models currently consist of six models, including three sports cars, the 488 GTB, the 488 Spider and the 812 Superfast, and three GT cars, the California T, the GTC4Lusso and the GTC4Lusso T. The Ferrari Portofino will replace the California T, with shipments expected to begin in the second quarter of 2018. We also offer special series cars based on our range models. These cars are characterized by significant hardware and software modifications (engine, aerodynamics, and dynamics among others), designed to enhance performance and drivability when compared to current range models. Our latest special series, unveiled in October 2015, is the F12tdf, which is based on the F12berlinetta. All of our range and special series models feature highly customizable interior and exterior options such as forged rims, luxury leathers, seat style, panoramic roof, dashboard and steering wheel inserts (see “—Personalization Program and Tailor Made Program”). 488 GTB The 488 GTB is a two seater berlinetta with a 670 hp mid-rear mounted V8 engine. It was launched in March 2015, 40 years after we unveiled our first ever mid-rear-engined V8 model (the 308 GTB). The model’s exterior and interior design was developed entirely by Ferrari Design Centre. Its large signature air intake scallop evokes the original 308 GTB and is divided into two sections by a splitter. Designed for track-level performance, the 488 GTB can also provide enjoyment to non-professional drivers for everyday use. Accelerating from 0-200 km/h in only 8.3 seconds, its new 3902 cc V8 turbo engine is at the top of the class for power output, torque and response times. In the cabin, the seamless integration of the new satellite control clusters, angled air vents and 66 67 ANNUAL REPORT OVERVIEW OF OUR BUSINESS instrument panel heightens the sense that the cockpit is completely tailored around the driver, leading to an ex- tremely sporty yet comfortable ambiance. The 488 GTB has collected various accolades including: Autocar (UK) – 2015 ‘Best Driver’s Car’, Sport Auto (Germany) – 2015 Best Brands Awards – “Best Coupé over €150,000” and Middle East Car of the Year (MECOTY) – ‘Best Supercar 2015’. 488 Spider Unveiled at the Geneva Motor Show in 2017, the 812 Superfast is equipped with a 800 hp V12 engine. Built around highly evolved transaxle architecture and equipped with leading-edge components and controls, it boasts a striking design and aerodynamics as well as uniquely smooth handling. It ushers in a new generation of Ferrari 12-cylinders and we believe it is the new benchmark for mid-front-engined sports cars. This is a model that will deliver a riveting, rewarding driving experience on both road and track, thanks to its superb handling and ride comfort on longer trips. The 812 Superfast incorporates several innovations such as EPS (Electric Power Steering) for pure exhilarating fun, PCV system (Passo Corto Virtuale - four wheel steering system), an evolution of Side Slip Control (SSC) and innovative aerodynamics content. F12tdf The 488 Spider, launched in September 2015, is a two seat coupe with a 670 hp mid-rear mounted V8 engine. Its retractable hard top, which saves approximately 25 kg on a soft top, unfolds and retracts in 14 seconds and can also be raised or lowered while the car is moving. If offers the full experience of sports car driving, especially on mixed and challenging surfaces, but aims to cater to those who do not need to constantly push their car to the limit on the track. Styled entirely in-house at Ferrari Design Centre and designed around the retractable hard top concept, the 488 Spider combines the prowess of the 488 GTB coupe’s mid-rear V8 with innovations in aerodynamics, including a new Ferrari-patented blown spoiler, which allows air to enter an intake at the base of the rear screen and exit via the bumper and reduces drag. The 488 Spider accelerates from 0 to 100 km/h in 3.0 seconds and from 0 to 200 km/h in 8.7 seconds and offers exceptional dynamic behavior, with close to no turbo lag and response time of just 0.8 seconds. 812 Superfast The F12tdf was unveiled in October 2015 and has finished its limited series run in 2017. The F12tdf is our latest special series sports car (based on the F12berlinetta), which pays tribute to the Tour de France, the legen- dary endurance road race that Ferrari dominated in the 1950s and 1960s. Designed entirely in-house at Ferrari Design Centre, the F12tdf is a two seat coupe equipped with a 6262cc 65° V12 engine with a maximum power of 780 hp at 8,500 rpm. The F12tdf is the most powerful high performance Ferrari sports car ever built. Its engine’s sporty response is assured by a maximum torque of 705 Nm (up from 690 Nm) at 6,750 rpm with 80% of such force already available at 2,500 rpm. The F12tdf is equipped with a new Ferrari innovative rear-wheel steering system, known as the Virtual Short Wheelbase (or Passo Corto Virtuale), which together with wider front tires and other vehicle dynamic control systems provides the steering wheel response times and turn-in of a competition car while increasing stability at high speed. These factors combine to produce an outstanding acceleration: 0-100 km/h in 2.9 seconds and 0-200 km/h in 7.9 seconds. California T 68 69 ANNUAL REPORT OVERVIEW OF OUR BUSINESS The California T, which is being phased out, followed the great success of our 2008 California model and is equipped with a 560 hp V8 turbo engine. Launched in 2014, it is the only GT car in the segment to combine a retractable hard top, rear seats and a ski passage to the spacious trunk. Its new turbocharged V8 engine comes with a variable boost management system. This makes it the only turbo engine in the world with close to no turbo lag. It also features a revised rear and interior design and a 15 percent reduction in fuel consumption compared to its predecessor. Its lines, penned by Ferrari Design Centre in collaboration with Pininfarina, were awarded the 2015 Red Dot Design Award. In January 2016, we announced the introduction of the Handling Speciale Package (“HSP”) on the California T. The HSP, designed to ensure increased performance, handling and response for a more sporty driving experience, was launched at the Geneva Motor Show in March 2016. Ferrari Portofino GTC4Lusso Unveiled in February 2016, the GTC4Lusso is our latest four-seater four-wheel drive Grand Tourer model. Its name recalls historic Ferrari models, such as the 330GT 2+2 and the 250 GT Berlinetta Lusso, renowned for their combination of elegance and performance. The Ferrari Design-penned GTC4Lusso adds a further refinement to the shooting brake coupe style to produce a streamlined, tapered silhouette. The GTC4Lusso is equipped with a 6262cc 65° V12 engine with a maximum power of 690 hp, maximum speed of 335/Km/h and acceleration of 0-100 km/h in 3.4 seconds The Ferrari-patented integrated four wheel drive and steering system allows the driver to effortlessly handle the exceptional torque in a variety of road conditions. Shipments of the GTC4Lusso began in the third quarter of 2016. GTC4Lusso T Unveiled in September 2017 at the Frankfurt Motorshow, the Ferrari Portofino is the successor of the California T in the Ferrari GT range. The model is set to lead its segment thanks to a combination of outright performance and versatility in addition to a level of driving pleasure and on-board comfort that we believe is unparalleled on the market. The car is 80 kg lighter than the California T thanks to the adoption of new components featuring innovative designs made possible by the use of advanced production techniques. This, combined with a 40 cv higher output than the California T, has resulted in a significant hike in performance and a corresponding drop in emissions. The Ferrari Portofino is capable of unleashing 600 cv and sprinting from 0 to 200 km/h in just 10.8 seconds. It combines the advantages of a retractable hard top, a roomy boot and generous cockpit space, complete with two rear seats suitable for short trips. The new car, which takes its name, Portofino, from the renowned village on the Italian Riviera, an eponym for stylish elegance, is a Ferrari designed to be driven every day delivering a unique Ferrari sound and superb driving pleasure even in day-to-day situations. 70 71 ANNUAL REPORT OVERVIEW OF OUR BUSINESS Ferrari further broadened its range at the Mondial de l’Automobile 2016 in Paris with the world premiere of the new GTC4Lusso T, Maranello’s first ever full 4-seater to be powered by a V8, combining sportiness and versatility with day-to-day drivability. The GTC4Lusso T is equipped with the latest evolution of the “International Engine of the Year 2016” V8 turbo family. The 3.9-liter engine produces a maximum of 610 cv at 7,500 rpm, delivering instant throttle response and smooth progressive pick-up across the rev range. This impressive performance is matched by fuel consumption figures that yield an excellent range, making the car ideal for both city driving and longer journeys. Adding four-wheel steering and specific calibration of the dynamic control systems to the mix has produced an extremely agile and responsive car. Production of the GTC4Lusso T started in December 2016 and shipments started in the second quarter of 2017. Personalization Program and Tailor Made Program All of our models feature highly customizable interior and exterior options, which together comprise our personalization catalogue. Some of these options include custom shop wheels, alternate brake caliper colors, parking cameras, MagneRide dual mode suspension, sport exhaust systems, panoramic roof option, various door configurations, steering wheel inserts and state of the art custom high fidelity sound systems. With our “Special Equipment” program, we offer clients additional customization choices for their car. Our specialists are able to guide clients in creating a very customized car through a wide catalog of special items such as different types of rare leathers, custom stitching, special paints, special carbon fiber, and personalized luggage sets designed to match the car’s interior. The “Atelier” and “Tailor Made” programs provide two additional levels of personalization in accordance with the expectations of our clients. In particular, in the “Tailor Made” program a dedicated Ferrari designer assists clients in selecting and applying virtually any specific design element chosen by the client. Our clients benefit from a large choice of finishes and accessories in an array of different materials (ranging from cashmere to denim), treatments and hues. To assist our clients’ choice we also offer three collections inspired by Ferrari’s own tradition: Scuderia (taking its lead from our sporting history), Classica (bringing a modern twist to the styling cues of our signature GT models) and Inedita (showcasing more experimental and innovation-led personalization). Tailor Made 70th Anniversary Collection As part of activities to mark the 70th anniversary of the company, Ferrari Tailor Made, together with the designers of the Ferrari Design Center have put a modern twist on the stylistic features that distinguished 70 iconic Ferraris of the past interpreted in a contemporary way on five of our range models for a total of 350 special edition liveries. All the cars are distinguished by the commemorative logo of the 70th anniversary along with an ID plaque with the name of the model that inspired it. The project was unveiled at the Paris Motor Show in September 2016. Limited Edition Supercars, Fuori Serie and One-Offs In line with our tradition of supercars starting with the 288GTO in 1984 through to the Enzo in 2002 and the LaFerrari Aperta, our latest supercar which we launched in 2016, we also produce limited edition supercars. These are the highest expression of Ferrari road car performance at the time and are often the forerunners of technological innovations for future range models, with innovative features and futuristic design. Furthermore, in connection with certain events or celebrations, we also launch very limited edition cars (our fuori serie). These models can be offered globally, or may be limited to specific local markets. Based on an exotic product concept not available on the standard Ferrari model range, these cars feature completely unique design and specifications compared to our other models. LaFerrari Aperta LaFerrari Aperta is the open top version of the LaFerrari, the latest in our line of supercars. Like its coupé sibling, the LaFerrari Aperta is equipped with hybrid technology. Alongside its powerful rear-wheel drive layout V12 engine (which generates 800 hp), the hybrid system comprises two electric motors and a special battery consisting of cells developed by the Scuderia Ferrari where the F138 KERS technology was pioneered. Because the battery generates an additional 163 hp, LaFerrari Aperta has a combined total of 963 hp. LaFerrari Aperta’s HY-KERS system is designed to achieve seamless integration and rapid communication between the V12 and electric motor, thus blending extreme performance with maximum efficiency. Thanks to the hybrid technology, LaFerrari Aperta generates almost 50 percent more horsepower than the Enzo, its predecessor, and 220 hp more than the F12, our most powerful car to date. Production and shipments started in the third quarter of 2016 and are expected to end in 2018. 72 73 ANNUAL REPORT OVERVIEW OF OUR BUSINESS Ferrari J50 The J50 is a two-seater, mid-rear-engined roadster that marks a return to the targa body style evocative of several well-loved Ferrari road cars of the 1970s and 1980s. It was introduced during a celebration held at the National Art Center in Tokyo to commemorate the 50th anniversary of Ferrari in Japan in December 2016. Designed by the Ferrari Styling Centre team in Maranello, just 10 examples of the J50 will be built and, in the spirit of Ferrari’s fuori serie tradition, each one will be tailored specifically to the customer’s requirements. Based on the 488 Spider, the J50 is powered by a specific 690 cv version of the 3.9-liter V8 that won the overall International Engine of the Year Award this year. The bodywork is all new and heralds a radical and futuristic design language, with a highly distinctive personality that suits the tastes of a clientele seeking the utmost in innovative styling. Production started during 2017 and all deliveries will take place in 2018. One-Offs Finally, in order to meet the varying needs of our most loyal and discerning clients, we also from time to time produce one-off models. While based on the chassis and equipped with engines of one of the current range models for homologation and registration purposes, these cars reflect the exact exterior and interior design specifications requested by the clients, and are produced as a single, unique car. Some of the most iconic models to have emerged from our One-Off program include the SP12 EC, the F12 TRS (a radical two-seat roadster created on the platform of the F12berlinetta in 2014) and the 458MM Speciale. The program is expanding due to increasing demand. Non-Registered Racing Cars Based on our Sports and GT cars, we also develop and manufacture special racing cars. These cars are not registered for use on the road and may only be used on track in competitive and non-competitive race events. This activity is managed by the Attività Sportive GT Department which includes: Competizioni GT (taking care of the GT racing) and Corse Clienti (taking care of the Ferrari Challenge one-make series, The Corso Pilota driving courses, the XX Programmes and the F1 Clienti activity). 488 GTR/GTLM and 488 GT3/GTD 74 75 ANNUAL REPORT OVERVIEW OF OUR BUSINESS They are sold to clients and private teams as racing cars specifically developed for professional racing with the aim to compete in the FIA World Endurance Championship, in several GT International series and also historical races like Daytona 24 Hours, Le Mans 24 Hours. F1 Clienti In 2016, its first year of competition, the 488 GTE won the FIA World Cup for GT Manufacturers and the 488 GT3 special car won several other competitions such as the GTD class of the IMSA SportsCar Championship and the GT class of the Asian Le Mans Series. In 2017, the 488 GTE was even more successful gaining the FIA World Title for GT Manufacturers, the Drivers Title and Team Cup and the European Le Mans Series. The 488 GT3/D also doubled the victory, winning once again the IMSA SportsCar Championship. XX Programme Introduced in 2003, the F1 Clienti program allows a limited number of exclusive Ferrari lovers to both purchase previously-used Scuderia Ferrari Formula 1 cars and experience them in full. Formula 1 cars that we sell as part of this program include recent cars of the 21st century, such as those driven by Kimi Raikkonen and Felipe Massa, and cars from decades ago, such as the 412 T2 of 1995, the last Formula 1 car to be powered by a 12-cylinder engine which is now back on the racetrack thanks to F1 Clienti. Owners can focus exclusively on the driving experience, while the F1 Clienti program can arrange for the cars to be kept at Maranello for safekeeping, where F1 technicians and mechanics perform regular maintenance of the cars. The F1 Clienti program includes a series of events throughout the year that enable customers to experience the pleasure of driving on prestigious tracks in front of a live crowd. Ferrari Challenge Trofeo Pirelli - 488 Challenge Since 2005, we have been operating our XX Programme, a non-competitive “owner-test drivers” program organized at some of the best known race tracks in Europe, Asia and North America. Through the XX Programme, we test advanced solutions and technological innovations by providing a select group of clients the opportunity to drive cars enhanced with superior power and performance characteristics. As part of this program, we have developed the FXX K, based on LaFerrari, shipments of which started in the second quarter of 2015. Although conceived as a track-only model, the FXX K was specially styled by Ferrari Design Centre working closely with the aerodynamics engineers. The FXX K received the Red Dot “Best of the Best” Design Award in 2015, one of the most recognized design awards in the world. The FXX K Evo was launched in October 2017 at the Finali Mondiali in Mugello. 76 77 ANNUAL REPORT OVERVIEW OF OUR BUSINESS Ferrari Challenge is the biggest one-make series in the world. The series was established in 1993 and the events are FIA approved, thus ensuring very high safety standards and dependable organization. The championship was an immediate success: the formula for the event ensures that cars are very closely matched, thus putting the focus on the drivers. There are three series: Europe, which is the oldest, North America and Asia-Pacific. The 488 Challenge marks the 25th anniversary of the Ferrari Challenge and was launched in December 2016 at the Finali Mondiali in Daytona. The 488 Challenge is the first equipped with a turbo engine to get on track in the Ferrari one-make series. It is the most powerful car in the Challenge history thanks to 670 hp from the V8 3.9-liter engine derived from the 488 GTB. Ferrari’s patented Slip Slip Angle Control software is installed for the first time on a Challenge car, improving the longitudinal acceleration through bends by 4.2 percent. Production started in 2017. Corso Pilota Driving Courses Initiated in 1993, Corso Pilota driving courses enable Ferrari customers to experience and appreciate the full formidable performance of the Ferrari models in a safe environment. It provides an opportunity to attend various, increasingly technical and complex courses that begin with the Sport, Advance, and Evolution levels, and culminate with the Challenge course. Led by professional instructors with years of Ferrari driving experience, the courses are designed to progressively develop participants’ driving style and skills so that they will obtain sufficient mastery to compete safely in real Challenge Championship races. The selection and preparation of the Ferrari cars used for the courses is of fundamental importance and the current fleet consists of 488 GTB, 812 Superfast and 488 Challenge models. Sales and After-Sales Our commercial team, which includes 234 employees at December 31, 2017, is organized in four geographic areas covering our principal regional end markets: (i) EMEA, which is also responsible for South Africa and India, (ii) Americas, (iii) China, Hong Kong and Taiwan (on a combined basis), and (iv) Rest of APAC (which includes the rest of Asia and Oceania). Dealer network We sell our cars exclusively through a network of authorized dealers (with the exception of one-offs which we sell directly to end clients). In our larger markets we act as importer either through wholly owned subsidiaries or, in China, through a subsidiary partly owned by a local partner, and we sell the cars to dealers for resale to end clients. In smaller markets we generally sell the cars to a single importer. We regularly assess the composition of our dealer network in order to maintain the highest level of quality. The dealer assessment and selection process may cause a variation of the number of dealers from time to time. Following our decision to terminate the distributor in Hong Kong in 2016, we now import cars into Hong Kong directly and have appointed a new dealer which became fully operational during the third quarter of 2017. Moreover, we decided to establish a fully-owned subsidiary aimed to be closer to the market and enhance the brand visibility in this market. At December 31, 2017, our network comprised 164 dealers operating 185 points of sale. We do not own dealerships and, while our strategy does not contemplate owning dealerships, we retain flexibility to consider all market requirements from time to time. We believe that our careful and strict selection of the dealers that sell our cars is a key factor for promoting the integrity and success of our brand. Our selection criteria are based on the candidates’ reputation, financial solidity and track record. We are also mindful to select dealers who are able to provide an in-store experience and to market and promote our cars in a manner intended to preserve the Ferrari brand integrity and to ensure the highest level of client satisfaction. While dealers may hold multiple franchises, we enjoy a high degree of prominence and level of representation at each point of sale, where most of the client interface and retail experience is exclusive to Ferrari. Our network and business development team works directly with individual dealers to ensure various standards are met. All dealers must conform to our rigorous design, layout and corporate identity guidelines ensuring uniformity of the image and client interface. Through the Ferrari Academy we provide training to dealers for sales, after sales and technical activities to ensure our dealer network delivers a consistent level of market leading standards across diverse cultural environments. We train and monitor dealers intensively and we collect and observe data relating to their profitability and financial health in order to prevent or mitigate any adverse experience for clients arising from a dealer ceasing to do business or experiencing financial difficulties. Our representatives visit dealerships regularly to measure compliance with our operating standards. We have the right to terminate dealer relationships in a variety of circumstances including failure to meet performance or financial standards, or failure to comply with our guidelines. We provide a suggested retail price or a maximum retail price for all of our cars, but each dealer is free to negotiate different prices with clients and to provide financing. Although many of our clients in certain markets purchase our cars from dealers without financing, we provide direct or indirect finance and leasing services to retail clients and to dealers. (See “—Financial Services”). The total number of our dealers as well as their geographical distribution tends to reflect closely the development or expected development of sales volumes to end clients in our various markets over time. Dealer turnover is relatively low, reflecting the strength of the franchise and our selection processes, but is sufficient to guarantee an orderly renewal over time and to stimulate the network’s health and performance. The chart below sets forth the geographic distribution of our 185 points of sale at December 31, 2017: FERRARI Maranello Americas 50 POS U.S.A. 38 POS Canada 5 POS EMEA 91 POS North eeurope 18 POS Central Europe 20 POS Latin America 7 POS East West Europe & Africa 25 POS South Europe 16 POS Middle East 12 POS China, Hong Kong, Taiwan 22 POS China 18 POS Taiwan 3 POS Hong Kong 1 POS Rest of APAC 22 POS North East Asia 11 POS South East Asia 5 POS Australasia 6 POS 78 79 ANNUAL REPORT OVERVIEW OF OUR BUSINESS Our sales are diversified across our dealer network, with the largest dealer representing approximately 2.2 percent of sales, and our 15 largest dealers representing 21.7 percent of sales. As part of our supply and demand management, we determine allocations based on various metrics including expected developments in the relevant market, the number of cars sold historically by the various dealers, current order book of dealers and the average waiting time of the end client in the relevant market. Our order reporting system allows us to collect and monitor information regarding end client orders and is able to assist us in production planning, allocation and dealer management. Parts We supply parts for current and older models of Ferrari to our authorized dealer network. In addition to substitution of spare parts during the life of the car, sales are driven by clients’ demand for parts to customize their cars and maximize performance, particularly after a change in ownership and to compete in the Ferrari Challenge and other client races. We also supply parts to Ferrari models currently out of production, with stocks dating back to 1995. The stock of parts for even older models is currently owned and managed by a third party which in some cases also manufactures out-of-stock parts based on our design. The sale of parts is a profitable component of our product mix and it is expected to benefit from the increase in the number of Ferrari cars in circulation. After Sales Dealers provide after sales services to clients, either at facilities adjacent to showrooms, or in stand- alone service points across 231 facilities worldwide. After sales activities are very important for our business to ensure the client’s continued enjoyment of the car and the experience. Therefore, we enforce a strict quality control on our dealers’ services activities and we provide continued training and support to the dealers’ service personnel. This includes our team of “flying doctors,” Ferrari engineers who regularly travel to service centers to address difficult technical issues for our clients. We also sell certain cars together with a scheduled program of recommended maintenance services in order to ensure that these cars are maintained to the highest standards to meet our strict requirements for performance and safety. While we do not have any direct involvement in pre-owned car sales, we seek to support a healthy secondary market in order to promote the value of our brand, benefit our clients and facilitate sales of new cars. Our dealers provide an inspection service for clients seeking to sell their car which involves detailed checks on the car and a certification on which the client can rely, covering, among other things, the authenticity of the car, the conformity to original technical specifications, and the state of repair. Furthermore, we offer owners of classic Ferrari cars maintenance and restoration services. Client Relations Our clients are the backbone of our business together with our brand and our technology. We do not promote our brand or our cars through general advertising. Our main brand marketing and promotional activities have two principal targets. Firstly, we target the general public. Our most significant effort in this respect is centered on our racing activities and the resonance of Scuderia Ferrari (see “—Formula 1 Activities”). We also engage in other brand- promotional activities, including participation in motor shows and other public events. Secondly, we target existing and prospective clients, seeking to promote clients’ knowledge of our products, and their enjoyment of our cars both on road and on track, and to foster long term relationships with our clients, which is key to our success. In 2017, more than 65 percent of our new cars were sold to Ferrari owners. By purchasing our cars, clients become part of a select community sharing a primary association with the Ferrari image and we foster this sense of fellowship with a number of initiatives. We strive to maximize the experience of our clients throughout their period of interaction with Ferrari — from first contact, through purchasing decision process, to waiting-time management and ownership. Client events We organize a number of client events at Maranello and elsewhere. Our factory in Maranello is the core of our client engagement strategy and a symbolic hub attracting clients and prospects worldwide. Upon invitation, clients and prospects can visit the factory, witness some of its workings and experience several Ferrari core values such as heritage, exclusivity and customization. At the factory, clients have the opportunity to configure their cars through our personalization and bespoke program (see “—Personalization Program and Tailor Made Program”). Every new model launch is carefully staged and selected clients and prospects have preferential access to the new car. The new model presentation begins with the release of images providing a preliminary, often partial view of its design. Clients are then invited to a preview or world premiere. A public model presentation generally follows at motor shows where clients are provided access to the Ferrari stand. Further country and regional events follow before delivery of the first cars to dealers. During 2017, to celebrate our 70th anniversary, over 60 nations hosted Ferrari events crafted to treat clients and enthusiasts to a string of unique experiences as part of the “Driven by Emotion” concept. Thus March 12, 2017 marked the start of the anniversary events, with Australasia opening the program. The anniversary celebrations were flanked by many initiatives paying homage to the Cavallino Rampante heritage, not least two exclusive tours through Tuscany: the Cavalcade Classiche in May devoted to the cars that have made the history of Ferrari, and the 250 GTO rally, dedicated to one of the best known and admired Ferraris of all time. On September 7 and 8, moreover, clients were invited to a two day World Premiere of the Ferrari Portofino, the new GT convertible with a 600 hp V8 engine, at the famous former fishing village whose name it bears. The festivities for the 70th anniversary culminated in Maranello on the weekend of September 9 and 10, when Ferrari hosted over 4,000 clients and almost 1,000 cars from all over the world at its Fiorano track. 80 81 ANNUAL REPORT OVERVIEW OF OUR BUSINESS Driving events Driving events serve the dual objective of allowing clients to experience at their best the emotion of driving a Ferrari car, and to foster client loyalty and repeat purchases by creating superior car-usage occasions. Track and sporty driving activities are mainly targeted to clients with a preference for sports models. In addition to several track day activities, organized by local sales departments and dealers to allow clients to use their cars on ad-hoc rented tracks, Ferrari has a central department responsible for professionally organizing races and racing courses, Corse Clienti. The Corse Clienti activities take place on some of the world’s most famous race tracks, and include both competitive races, such as the Ferrari Challenge Championships, and non-competitive events, such as with XX and F1 Programme. The XX and F1 Programme is a highly selective initiative dedicated to a restricted group of clients who own non-homologated GT race cars and F1 cars previously used in the Formula 1 Championship. Ferrari Challenge and XX/Formula 1 events are sometimes accompanied by so- called Ferrari Racing Days. These events are open to non-competing clients and prospects and a wider audience, and they offer the opportunity for important client gatherings. In addition to on-track racing, we organize various on-the-road driving events, including both proprietary formats (Ferrari Cavalcade, also including the International Edition) or with a branded presence within an established driving event. For example, in the Ferrari Tribute to Mille Miglia and the Ferrari Tribute to Targa Florio modern Ferrari cars participate in their own regularity rally taking place shortly before the start of the classic Mille Miglia and Targa Florio races. We see nurturing our clients’ passion for driving as a key asset for our future commercial success, particularly in markets where racing traditions are less pronounced. We offer to our prospective and existing clients interested in new Ferrari models our Esperienza Ferrari initiative, which consists of driving sessions designed to allow participants to experience the pleasure of driving a Ferrari with a team of highly qualified and skilled Ferrari instructors and technicians professionally trained in high-performance driving. In addition we also offer on-track driving courses to our clients, catering to different levels of skill and experience and teaching essential driving skills for high performance cars. In our newer markets, such as China, we also offer complimentary driving courses on track to any new car buyer. Ferrari Classiche The Ferrari Classiche department aims to provide Ferrari customers with a point of reference for managing their historic Ferrari vehicles with the objective of keeping as many of these classic cars on the road as possible. Services include the certification of the authenticity of classic Ferrari cars and vehicles of particular historical relevance, the management of Ferrari restoration and repair activities, as well as the management of Ferrari spare parts, including when these are no longer available on the market. The department also provides advice on repair operations carried out on Ferrari Classiche cars within its network. Ferrari Classiche aims to create a platform of information and technical expertise to preserve and enhance over time the awareness and value of Ferrari’s heritage and brand. We view the surviving Ferrari vehicles of historical value as the tangible legacy and incarnation of our brand. The Ferrari Classiche department also supports and encourages the direct participation of clients in strategic historical events. The Ferrari Classiche department in Maranello consists of an office of specialists and a workshop in which historic cars are restored and repaired. In addition, in order to provide an enhanced service to owners away from the proximity of the main workshop in Maranello, starting in 2017 Ferrari Classiche has authorized a new service network with 48 new “Officina Ferrari Classiche” workshops, primarily for vehicle repairs and the certifications’ inspections or revalidation, and the network is expected to expand in future periods. The originality of the car with respect to the initial specifications is checked via a technical inspection, performed either at the Ferrari Classiche facility in Maranello or at an authorized Officina Ferrari Classiche, and benefits from a comprehensive archive containing drawings of each of the individual chassis details of historical components. Based on the evidence gathered during this inspection, the car is then presented to an expert committee, chaired by the founder’s son, Piero Ferrari, for the certification. In recent years, Ferrari has certified approximately 400 cars each year. At the Maranello workshop, Ferrari Classiche carries out approximately 10 full restorations every year, along with 20 partial restorations. We use either original components and spare parts or replicas manufactured in accordance with the original specifications, and our restoration service offers our clients the opportunity to reinstate any classic Ferrari to its original pristine conditions. Formula 1 Activities Participation in the Formula 1 World Championship with Scuderia Ferrari is the core element of our marketing effort and an important source of technological innovation for the engineering, development and production of our Sports and GT cars. The Formula 1 World Championship is the pinnacle of motorsports with over 350 million television viewers in 2017 (Source: FOM/Kantar Media 2017), which make it one of the most watched annual sport series in the world. Formula 1 cars rely on advanced technology, powerful hybrid engines and cutting edge aerodynamics, While Europe is the sport’s traditional base, Formula 1’s reach has expanded significantly and an increasing number of Grand Prix are held in non-European countries, such as China, Bahrain, United Arab Emirates, Singapore, Australia, Brazil, Canada, Japan, Mexico and the United States. This provides participants in the Formula 1 World Championship exceptional visibility on the world stage, and coverage now extends well beyond the range of conventional media with growing exposure on social networks. Scuderia Ferrari has been racing in the Formula 1 World Championship since the series launched in 1950, and won its first Grand Prix in 1951. We are the only team that has competed in each season since launch and the oldest and most successful in the history of Formula 1, with 229 Grand Prix wins. Throughout our racing history, we have won 15 drivers’ championships and 16 constructors championships, more than any other team. Many of the best known drivers in the sport’s history have raced in Scuderia Ferrari’s distinctive red single- seaters including Alberto Ascari, Juan-Manuel Fangio, Niki Lauda, Gilles Villeneuve, Alain Prost and Michael Schumacher. Our drivers’ line-up currently comprises four-time World Champion Sebastian Vettel, who joined Ferrari at the beginning of 2015, and Kimi Raikkonen, now in his second term with the Scuderia Ferrari, for which he won the World Drivers title in 2007. Together, the two drivers have won a total of 67 Grands Prix. The 2017 Formula 1 season was our most successful in the last seven years, with our team achieving five Grands Prix victories and five pole positions. In the Constructors’ Championship we achieved our best result 82 83 ANNUAL REPORT OVERVIEW OF OUR BUSINESS since the current point system was implemented in 2010. Reorganization of the team and continuous research are part of an ongoing process aimed at further improving team performance in the future. Participation in the Formula 1 World Championship is regulated by bilateral Team Agreements entered into between Formula 1 World Championship Limited (FOWC), the Formula 1’s commercial rights holder, and each competing Formula 1 racing team (including Ferrari) and by regulations issued by the Federation Internationale de l’Automobile (FIA), the motor sport’s governing body. On January 23, 2017, Liberty Media Corporation completed the acquisition of all the shares of Delta Topco Limited, the holding company of FOWC. The bilateral Team Agreements will remain unaffected by the change of control. As a consequence of the change of control, Ferrari exercised the options it was granted pursuant to the Team Agreement and in February 2017 received approximately $11.4 million in cash (including $2.7 million of previously undistributed dividends), 145 thousand Liberty Media Corporation shares (“Liberty Shares”) and $911 thousand of Liberty Media exchangeable notes. The Liberty Media exchangeable notes were subsequently converted to Liberty Media shares in November 2017. The Team Agreements cover the 2013-2020 racing seasons and govern the terms by which the racing teams take their share of commercial profits. The FIA regulations regulate how the cars are manufactured and how the teams compete in races and include technical regulations governing aspects ranging from tires, weight to ignition, fueling and throttle requirements, and sporting regulations covering scoring and racing procedures. In return for their participation in Formula 1 races the teams receive a share of a prize fund based on the profits earned from Formula 1 related commercial activities managed by FOWC, including in particular, television broadcasting royalties and other sources, such as racetrack owners’ fees. Shares in a prize fund are paid to the teams, largely based on the relative ranking of each team in the championship. We use our share of these payments to defray part of the costs associated with Scuderia Ferrari, including the costs of designing and producing a set of single-seaters each year and the costs associated with managing a racing team including earnings of drivers, who generally are among the most highly paid athletes in the world. The terms under which racing teams may continue to participate in racing seasons following expiration of the current Team Agreements in 2020 are under discussion with the new owners of Formula 1 business. See “Risk Factors - Our revenues from Formula 1 activities may decline and our related expenses may grow.” Improvements in technology and sometimes, changes in regulation, require the design and production of a new racing car every year. Therefore, in addition to our long-term research and development efforts, we begin designing our single-seaters each year in the Spring, in anticipation of the start of the racing season the following March. While the chassis we build each year are designed to be used throughout the racing season, the majority of other components fitted on our cars are adjusted from race to race depending on the characteristics of the circuits. To maximize the performance, efficiency and safety of our single-seaters, while complying with the strict technical rules and restrictions set out by the FIA, our research and development team plays a key role in the development of our engines and cars. We often transfer technologies initially developed for racing to our road cars. Examples include steering wheel paddles for gearshifting, the use and development of composite materials, which makes cars lighter and faster, and technology related to hybrid propulsion. Our road cars (especially our sports car models) have benefited from the know-how acquired in the wind tunnel by our racing car development teams, enjoying greater stability as they reach high speeds on and off the track. Our research and development team focused on combining minimal lap times with maximum efficiency, leading to advances in kinetic energy recovery system, or ERS, technology. Current advanced ERS feature two electric motor/generator units in every car, which allow the driver to recover, store and deploy energy generated both by the vehicle during braking and by the exhaust gases through a turbocharger. Building on our racing team’s expertise, we developed a hybrid ERS system for our LaFerrari and LaFerrari Aperta road cars. The high brand visibility we achieve through participation in the Formula 1 World Championship has historically enabled us to benefit from significant sponsorships. Philip Morris International has been Scuderia Ferrari’s official sponsor for over forty years and, together with Shell (our official sponsor since 1996) remain our principal official sponsors. Banco Santander was also one of our official sponsors from 2008 until the end of 2017. Other official sponsors include Alfa Romeo, UPS, Kaspersky lab, Weichai, Hublot and Ray-Ban. Our official suppliers include, among others, Pirelli, Puma, Ray-Ban, IVECO, Mahle, NGK, Magneti Marelli and OMR. Visibility and placement of a sponsor’s logo reflects the level of sponsorship fees. Historically, our sponsors have sought advertising opportunities on the chassis of our cars, on clothes worn by our team members and drivers, and in the right to mention Ferrari in their marketing materials. We use the platform provided by Formula 1 for a number of associated marketing initiatives, such as the hosting of clients and other key partners in the Scuderia Ferrari paddock to watch Grand Prix races, and our Formula 1 drivers participation in various promotional activities for our road cars. We often sell older single- seaters to clients for use in amateur racing or collection. More generally, Formula 1 racing allows us to promote and market our brand and technology to a global audience without resorting to traditional advertising activities, therefore preserving the aura of exclusivity around our brand and limiting the marketing costs that we, as a company operating in the luxury industry, would otherwise incur. The Mugello Circuit We acquired the international Mugello circuit in Scarperia, near Florence, in 1988. We have renovated its buildings, 5.2 km race track and other testing and racing facilities, making Mugello what we believe to be one of the world’s finest circuits of its type, with FIA Grade 1 and FIM Grade A certifications, the highest level of homologation for a racetrack. We promote the Mugello circuit to event organizers who regularly rent the circuit to host leading car and motorbike races, including the MotoGP World Championship since 1992. In 2017, almost 93,000 people attended the MotoGP World Championship at Mugello, a great attendance for the show. In 2011, the Mugello circuit won its fifth “Best Grand Prix” award, the highest honor given by the motor sport world for MotoGP organizers. The Mugello circuit is the only track race to have received this award five times. Brand Activities Ferrari is one of the world’s leading luxury brands. We engage in brand development and protection activities through licensing contracts with selected partners, retail activities through a chain of franchised or directly managed stores, licensed theme parks and the development of a line of apparel and accessories sold exclusively in our monobrand stores and on our website www.store.ferrari.com. Ferrari owns and manages two museums, one in Maranello and one in Modena, which attracted more than 530,000 visitors in 2017. 84 85 ANNUAL REPORT OVERVIEW OF OUR BUSINESS Licensing and Theme Parks Retail and E-Commerce We enter into license agreements with a number of licensees for the design, development and production of Ferrari branded products. We carefully select our licensees through a rigorous process and we contractually seek to ensure that our brand and intellectual property are protected and that the products which will eventually bear our brand are of adequate quality, appearance and market positioning. The table below sets forth our current licensing mix: Category Accessories Consumer electronics Fragrances Sportswear Theme Parks Toys Video games Watches Principal Licensees o Luxottica (sunglasses) o Tod’s (shoes and leather goods) o Various o Perfume Holding o Puma o Ferrari World, Abu Dhabi o Ferrari Land, Port Aventura o Bburago (play-set) o Lego (Lego toys) o Electronic Arts o Microsoft o Sony Polyphony o Ubisoft o Hublot (co-branded high-luxury watches) o Movado (Scuderia Ferrari Watches) Other (including collectors’ models, kid apparels, and accessories, stationary and credit cards) o Various A significant portion of our revenues from licensing activities consists of royalties we receive in connection with Ferrari World, our theme park in Abu Dhabi (13 percent of royalties generated by licensing activities). Ferrari World opened on Yas Island, on the North East side of Abu Dhabi’s mainland, in 2010. Ferrari World’s iconic sleek red roof is directly inspired by the classic double curve side profile of the Ferrari GT body, spanning 200,000 square meters and carrying the largest Ferrari logo ever created. Ferrari World Abu Dhabi offers an all-around Ferrari experience to children and adults alike. The attractions include futuristic 4D rides such as the child- friendly Speed of Magic and the world’s fastest roller-coaster, Formula Rossa, which reaches speeds of 240 km/h and simulates the breathtaking adrenaline rush of a Ferrari single-seater. New attractions like the roller-coaster Flying Aces, the children’s ride Benno’s Great Race and the Turbo Track vertical climbing accelerator have been opened in 2016 and 2017. Our second theme park, Ferrari Land Portaventura, opened in April 2017 near Barcelona, and includes Red Force, the tallest and fastest roller-coaster in Europe. In the long-term we aim to open one theme park in each of the main geographic areas where we operate, including North America and Asia. Through our network of stores (franchised or directly managed), we offer a wide range of Scuderia Ferrari branded products, including a line of apparel and accessories exclusively sold in our stores and on our website. All products sold in our stores and on our website are either directly sourced from our selected network of suppliers or manufactured by our licensees. At December 31, 2017, there were a total of 48 retail Ferrari stores, including those in Maranello, Milan, Rome, Macau, New York, Miami, Los Angeles, Johannesburg, Dubai and Abu Dhabi, of which 30 franchised stores (including 8 Ferrari Store Junior) and 18 stores owned and operated by us. We require all franchisees to operate our monobrand stores according to our standards. Stores are designed, decorated, furnished and stocked according to our directions and specifications. We use multiple criteria to select our franchisees, including know-how, financial condition, sales network and market access. Generally, we require that applicants meet certain minimum working capital requirements and have the requisite business facilities and resources. We typically enter into a standard franchising agreement with our franchisees. Pursuant to this agreement, the franchisee is authorized to sell our products exclusively at a suggested retail price. In exchange, we provide them with our products, the benefit of our marketing platform and association with our corporate identity. In recent years, e-commerce has proved to be an increasingly valuable sales channel, with over 490,000 registered users in more than 190 countries and translations in seven languages. Design, Development and Manufacturing Design The design of our cars is an essential and distinctive component of our products and our brand. Our designers, modelers and engineers work together to create car bodies that incorporate the most innovative aerodynamic solutions in the sleek and powerful lines typical of our cars. The interiors of our cars seek to balance 86 87 ANNUAL REPORT OVERVIEW OF OUR BUSINESS functionality, aesthetics and comfort. Our cockpits are designed to maximize the driving experience, more sporty or more comfortable, depending on the model through an ergonomic layout of all main controls clustered on the steering wheel, and our cars’ interiors boast elegant and sophisticated trims and details. A guiding principle of our design is that each new model represents a clear departure from prior models and introduces new and distinctive aesthetic elements, delivering constant innovation within the furrow of tradition. For the design of our cars we have relied historically on Italian coachbuilders such as Carrozzeria Touring, Vignale, Scaglietti and especially Pininfarina. The privileged partnership with Pininfarina, spanning over six decades, has helped define Ferrari’s design language and has established Ferrari at the forefront of design advance and excellence. Throughout the years this has been recognized repeatedly by a long series of awards being bestowed upon Ferrari road cars. In 2010 we established the Ferrari Design Centre, our in-house design department, in order to improve our control over the design process and ensure long-term continuity of the Ferrari style. Its mission is to define and evolve the stylistic direction of the marque, imprinting all new products with a modern stamp, according to a futuristic, uncompromised vision. The name and logo “Ferrari Design” denotes all concepts and works from Ferrari Design Centre (see “-Intellectual Property”). Ferrari Design handles all aspects of automotive styling for the Ferrari road cars product range, encompassing the styling of all bodywork, external components and interior trim, applied to series production models for the GT and Sports car range special editions, limited editions, one-off models, concept cars and some track-only models. Ferrari Design also includes a color & trim team which handles the choice of materials and finishes for both exterior and interior trim and, in addition, is responsible for the Tailor Made program in conjunction with the product marketing department. Ferrari Design is also regularly involved with the styling and conceptual definition of Ferrari branded products produced by our licensees (see “Brand Activities”). The department is organized as an integrated automotive design studio, employing a total workforce of approximately 90 people (both full-time workers and external contractors) including designers, 3D surfacing operators, physical modelers and graphic artists. It operates a modeling studio fully equipped with 5-axis milling machines with the capacity to develop various full-scale models (interior and exterior) in parallel. Ferrari Design Centre entirely designed our most recent cars, such as the FXX K Evo, the Ferrari Portofino, the 812 Superfast, and also the GTC4Lusso, the GTC4Lusso T, the F12tdf, the 488 Spider, the 488 GTB, the 488 Challenge, the FXX K, the LaFerrari, the LaFerrari Aperta and the limited-series J50, while it designed other current range models, such as the F12berlinetta, in collaboration with Pininfarina. Although our collaboration with Pininfarina is still active with regard to certain special models and fuori serie, we expect that the design and development of most of our future models will be carried out primarily by Ferrari Design Centre. During the 8 years of activity of the Ferrari Design Centre, our cars have been granted several renowned design awards, including, among the most recent: • 812 Superfast: Chicago Good Design Award (2017) • J50: Red Dot Best of the Best (2017); Chicago Good Design Award (2017) • LaFerrari Aperta: Honourable Mention - Sport, Performance and Innovation, International Compasso d’Oro Award (2017); Red Dot Design Award (2017) • GTC4Lusso: iF Gold Design Award (2017); Red Dot Design Award (2017); Most Beautiful Supercar of the Year - International Automobile Festival Paris (2017); Chicago Good Design Award (2017) • 458 MM Speciale: iF Design Award (2017); Red Dot Design Award (2017) • 488 GTB: Red Dot Best of the Best (2016); iF Design Award (2016) • 488 Spider: iF Design Award (2016); Autonis Design Award (Auto Motor und Sport, D) - Beste Design - Neuheit: Cabrios (2016); Chicago Good Design Award (2016) • F12tdf: Chicago Good Design Award (2016) • FXX K: Red Dot Best of the Best (2015), iF Gold Award (2016); Compasso d’Oro ADI (2016) • LaFerrari: Red Dot Design Award (2015); Best Cars - Coupé Category, Motor Presse Iberia Design of the Year (2015) • California T: Red Dot Design Award (2015) The new Ferrari Design Centre will be completed in Maranello in the first half of 2018. Sitting at the heart of the industrial complex, the new facility will cover more than 5,600 square meters distributed over four levels housing the main design office, a fully-equipped model making studio and a vast indoor/outdoor presentation space on the top floor. Additionally, the new building will host the Atelier and Tailor Made department to engage clients with Ferrari’s rich personalization services. The architectural concept of the building aims to reflect the symbolic value of Ferrari’s advanced design process, drawing upon the interaction between digital technologies and the best Italian handmade craftsmanship tradition. Product Development Our product development process is highly structured with the aim of allowing us to respond quickly to market demand and technological breakthroughs and to maintain our position at the top end of the market for car performance and luxury. Our technology team is comprised of approximately 750 engineers and technicians at December 31, 2017. All of our cars are designed and engineered in Italy, at our factories in Maranello and Modena (Carrozzeria Scaglietti). Our product development includes innovation programs, components programs and car programs, with regular management reviews and detailed cycle milestones. Our components programs are intended to ensure technological innovation and support the development of future models rather than to create an “off the shelf” catalog of available components. All our cars are designed and manufactured based on two highly modular architectures incorporating front and mid-rear engines respectively. This allows for flexible manufacturing at low volumes and easy adaptation to different models with limited additional investment. Our architectures utilize a number of common structures, 88 89 ANNUAL REPORT OVERVIEW OF OUR BUSINESS reducing tooling investment for new model production. When developing a new platform, we focus on innovation, leveraging on our collaboration with the select research centers and universities, and flexibility, allowing us to respond efficiently to potentially varied market demand. The flexibility of our platforms enables us to introduce our highly innovative contents on a wide range of models while, at the same time, reducing the fixed costs connected to the use of multiple platforms. Consistent with our mission to develop cutting edge sports and GT cars, our product development efforts continually focus on improving core components, such as the powertrain, car dynamics, and the use of materials such as special aluminum alloys and carbon fiber (see “—Design, Development and Manufacturing— Production Process”). The expertise we acquired in these fields has recently guided our efforts to combine improved performance with reductions in CO2 emissions. In recent years, calls for CO2 emissions reductions have come from regulatory initiatives as well as market demand. LaFerrari is an example of such efforts, and we believe it shows our ability to apply our core mechanical know-how to new and expanding fields such as hybrid technology. Until 2017, we applied a development cycle for our range models which included “modified” or “M” models that incorporated certain elements of their predecessor models with relevant modifications not only for aesthetic updates but also for key technological improvements. As a result of the progressive implementation of a broadened and hybridized product portfolio we are converging our models into common platforms that will provide additional flexibility to manage propulsion systems and their subsequent evolution and will be aimed at targeting multiple elements such as weight reduction, increased performance, contents and technological adaptations in connection with market regulations. We also run specific programs for our most critical components, independently from the development of new car models. This is the case of our engines, which we manufacture according to cycle milestones not necessarily connected with the release of a new car model. We have also been producing engines exclusively for Maserati. In 2011 we started the production of the F160 3.0-liter V6 Turbo, and since 2016 we also produce the F161 V6. In 2017, we produced approximately 46,000 engines for Maserati. (See “—Manufacturing of Engines for Maserati”). Many of our components, such as those relating to transmission, power steering, navigation systems and the instrument cluster, are co-designed by us and our suppliers based on our specifications. Our research and development operations constantly focus on innovating our cars’ concept and package, powertrains design, car architecture and components development. (See “—Research and Development”). Procurement We source a variety of components (including transmissions, brakes, driving-safety systems, navigation systems, mechanical, electrical and electronic, plastic components as well as castings and tires), raw materials (aluminum, and precious metals including palladium and rhodium), supplies, utilities, logistics and other services from numerous suppliers. Our focus on excellence, in terms of luxury and performance, require us to select suppliers and partners that are able to meet our high standards. For the sourcing of certain key components with highly technological specifications, we have developed strongly synergic relationships with some of our suppliers, which we consider “key strategic innovation partners.” We currently rely on 14 key strategic innovation partners, including GETRAG and Brembo for the supply of transmissions and brakes respectively. We have also developed strong relationships with other industrial partners for bodyworks and chassis manufacturing and for powertrain and transmissions, among other things. Pursuant to our make-or-buy strategy, we generally retain production in-house whenever we have an interest in preserving or developing technological know-how or when we believe that outsourcing would impair the efficiency and flexibility of our production process. Therefore, we continue to invest in the skills and processes required for low-volume production of components that we believe improve product quality. For the year ended December 31, 2017, the purchases from our ten largest suppliers by value accounted for approximately 20 percent of total procurement costs, and no supplier accounted for more than ten percent of our total procurement costs. We recognize the contribution of our suppliers to our success through various initiatives, including “Key Innovation Partners”, events devoted to Ferrari’s suppliers who displayed particular excellence or innovative flair. Production Process Our production facilities are located in Maranello and in Modena, Italy (see “Overview of our Business— Properties”). Our production processes include supply chain management, production and distribution logistics of cars in our range models and special series, as well as assembly of prototypes and avanseries. Notwithstanding the low volumes of cars produced, our production process requires a great variety of inputs —over 40,000 product identifier codes sourced from approximately 1,000 total suppliers — entailing a complex supply chain management to ensure continuity of production. Our stock of supplies is warehoused in Ubersetto, near Maranello, and its management is outsourced to the logistics company Kuehne & Nagel. Most of the manufacturing process takes place in Maranello, including aluminum alloy casting in our foundry, engine construction, mechanical machining, painting, car assembly, and bench testing; at our second plant in Modena (Carrozzeria Scaglietti) we manufacture our cars’ aluminum bodyworks. All parts and components not produced in house at Ferrari are sourced from our panel of suppliers (see “—Procurement”). In recent years we have made significant investments in our manufacturing facilities, and between 2002 and 2012 the plants housing our production processes were entirely renovated or rebuilt. We plan our investment activities based on an estimated plant useful life of approximately 20 years. Equipment, on the other hand, may require substantial investment with the introduction of new models, particularly in the case of shell tools for the foundry, tools for machining, feature tools for body welding and special mounting equipment for the assembly. At December 31, 2017, our production processes employed over 1,350 engineers, technicians and other personnel (approximately 1,230 blue collar employees including approximately 320 temporary production employees and approximately 120 white collar employees). We have a flexible production organization, which allows us to adjust production capacity to accommodate our expected production requirements. This is primarily due to the low volume of cars we produce per year and to our highly skilled and flexible employee base that can be deployed across various production areas. In addition, we can adjust our make-or-buy strategies to address fluctuations in the level of demand on our internal production resources. Our facilities can accommodate a meaningful increase in production compared to current output with the increase of weekend shifts to address 90 91 ANNUAL REPORT OVERVIEW OF OUR BUSINESS special peaks in demand. Production could be increased even further with the introduction of a second shift on car assembly lines compared to the single shift currently operated. We constantly work to increase the utilization rate and reduce the internal scrap rate and we closely monitor an index of our production efficiency. In the past few years we have reduced our cycle time by approximately three percent per year. We are also committed to improve the reliability of our cars, reduce their defects, and optimize their finishing. Unlike most low volume car producers, we operate our own foundry and machining department producing several of the main components of our engines, such as engine blocks, cylinders heads and crankshafts. We believe this accelerates product development and results in components that meet our specifications more closely. and give the bodies their final finish. In 2017 we substituted the robot which applies the base coat with a new generation robot to improve quality and technical efficiency. Assembly Line and Final Checks The final assembly of our cars takes place in our body-shop, built in 2008. We have two different lines placed at ground level and the first floor of the building. For each model, the initial assembly operations take place simultaneously on different lines and sections to maximize efficiency so while the body is assembled on the main line, the powertrain, as well as the cockpit and the doors, are prepared on a specific sub-line. Engine Production Personalization and Road Tests Our engines are produced according to a vertical structure, from the casting of aluminum in our foundry up to the final assembly and testing of the engine. Several of the main components of our engines, such as blocks and cylinders heads are produced at our foundry in Maranello. For this purpose, we use a special aluminum alloy that includes seven percent silicon and a trace of iron, which improves mechanical integrity, and our own shell and sand casting molds. Once all components are ready, engines are assembled, on different lines for our V8 engines, V12 engines and for the V6 engines we manufacture for Maserati. The assembly process is a combination of automatic and manual operations. At the start of the assembly process, each engine is identified with a barcode and operations are recorded electronically. Every engine then goes to the test benches where its power and torque output are measured to ensure it delivers the expected performance. In 2017 we produced an average of approximately 240 engines per day, including approximately 12 V12, 41 V8 (including 2 V8 turbo and 12 V8 aspirated for Maserati) and 187 V6 engines for Maserati (see “—Manufacturing of Engines for Maserati”). Body Assembly In parallel with the assembly of our engines, we prepare our body-shells at our panel shop Carrozzeria Scaglietti in Modena. The main components of body-shells are not manufactured internally but are sourced from manufacturers such as Officine Meccaniche Rezzatesi for chassis and Fontana Group and SuperForm for bodies. At Carrozzeria Scaglietti we have two different production lines dedicated to the assembly of our V8 and V12 aluminium bodies. We carefully check the alignment of the various parts —most importantly the engine cover and the wings —with electronic templates and gauges. Our highly trained specialists also perform surface controls to the aluminum panels and eliminate any imperfections by either filing or panel beating. In our Scaglietti plant we also have a dedicated line for the assembly of a special carbon fiber body for our supercar “LaFerrari Aperta”. Painting Our paint shop was inaugurated in 2004 with what we believe to be state-of-the-art technology. When transferred to our paint shop, the bodies are mounted on a loading bay, immersed in the cataphoresis tanks and subsequently transferred to a fixing gas fired oven at 140 degrees. Primers are then applied and fixed at 190 degrees until the completely grey body-shell is ready for painting. All body-shells are cleaned with automatic pressure blowers (to avoid the electrostatic effect) and carefully brushed with emu feathers (because of their natural electrostatic properties) to clean off any dirt particles or impurities before painting. The painting process is automated for the larger surfaces, while it is done by hand for some other localized areas. The whole car is painted at the same time to ensure color harmony. The bodies are finally polished with lacquer to fix the paint During the process of assembly of our cars we manage the fitting of all bespoke interiors, components and special equipment options that our clients choose as part of our personalization program (see “—Personalization Program and Tailor Made Program”). After the assembly phase, every car completes a 40-kilometer road test-drive. Finishing and Cleaning After the road test all cars go to the finishing department. There, we thoroughly clean interior and exterior, check the whole car, polish and finish the bodies to give them their final appearance. Manufacturing of Engines for Maserati We have been producing engines for Maserati since 2003. The V8 engines that we historically produced and continue to produce for Maserati are variants of Ferrari families of engines and are mounted on Maserati’s highest performing models, such as the Quattroporte, Ghibli and Levante (turbo engines), and the Granturismo and the Grancabrio (aspirated engines). All of the V8 engines that we sell to Maserati are manufactured and assembled according to the same production processes we adopt for the V8s equipped on our cars (see “-Production Process”). In 2017, we sold approximately 340 V8 turbo engines and approximately 2,530 V8 aspirated engines to Maserati. In 2011 we began producing a family of engines exclusively for Maserati, in much larger production volumes to be installed on the Quattroporte and Ghibli (mainly the F160 3.0-liter V6 Turbo engines), and from 2016 we started the production of F161 engines to be installed on the Levante, Maserati’s SUV. We have a multi-year arrangement with Maserati to provide V6 engines, up to 2020. Under the framework agreement, Maserati is required to compensate us for certain costs we may incur, such as penalties from our suppliers, if there is a shortfall in the annual volume of engines actually purchased by Maserati in that year. In 2017, we sold approximately 43,000 V6 engines to Maserati in four different versions, ranging from 330 hp to 430 hp. In order to meet the V6 volumes and specifications requirements, we built a dedicated assembly facility at Maranello with a much higher level of industrialization compared to production of our V12 and V8 engines. Due to the larger volumes and product specifications, our make-or-buy strategy for the production of F160 V6 and F161 V6 engines also differs from the strategy applicable to the production of Ferrari engines. The vast majority of the engine components are sourced externally from our panel of suppliers (see “—Procurement”) and then assembled in Maranello on our highly automatized V6 assembly line. From the sale of engines to Maserati, we recorded net revenues of approximately €302 million in 2017. 92 93 ANNUAL REPORT OVERVIEW OF OUR BUSINESS Financial Services We offer retail client financing for the purchase of our cars through Ferrari Financial Services (FFS) in our major markets, including the United States, as well as certain European markets through our associate Ferrari Financial Services GmbH (“FFS GmbH”). We also offer dealer financing through FFS in the United States. Until December 2014 we offered dealer financing in the UK, Germany, Belgium and Switzerland and until May 2015 in Japan. Through FFS, we offer a range of flexible, bespoke financial and ancillary services to clients (both new and current) interested in purchasing a wide range of cars, from our current product range of Sports and GT Cars, to older pre-owned models, to classic models, special series and competition cars, including retired Formula 1 single-seaters. FFS also provides special financing arrangements to a selected group of our most valuable and loyal customers. In December 2014, we entered into a partnership with FGA Capital S.p.A. (now FCA Bank S.p.A. or FCA Bank), a 50/50 joint venture between FCA Italy S.p.A. and Crédit Agricole Consumer Finance S.A.; through this partnership financial services are provided to Ferrari dealers and customers in certain European countries. FCA Bank operates in 17 countries. Research and development costs expensed during each period mainly include the research and development incurred for the Formula 1 racing activities to support the development of the sports and GT car models and prototypes, which are expensed as incurred. The following table summarizes our research and development expenditures in the years ended December 31, 2017, 2016 and 2015: Research and development costs expensed during the period Amortization of capitalized development costs Total research and development costs For the years ended December 31, 2017 2016 2015 556,617 100,502 657,119 (€ thousand) 509,580 104,055 613,635 446,726 114,856 561,582 We transfer technologies developed by our racing team to our Sports and GT models across all core vehicle development areas, such as aerodynamics, powertrain, and car dynamics. To that end, we also transfer research and development personnel between the Formula 1 team and the sports and GT cars team, and the two teams regularly join forces for ad-hoc projects in areas such as combustion engine, new materials or computational fluid dynamics for aerodynamic performance. In May 2015, we entered into a partnership with JACCS Co., Ltd to support sales volume growth in the Japanese market with a full scale customer and dealer finance arrangement. Vehicle Concept In light of our partnership with FCA Bank and JACCS Co., Ltd, and also due to changes to the banking and financial laws in Italy, we requested and obtained the cancellation of FFS from the list of regulated financial intermediaries in 2016. In November 2016, FCA Bank acquired a majority stake in FFS GmbH for a total purchase price of €18.6 million. As a result of the transaction, FFS and FCA Bank will continue the operations of FFS GmbH as shareholders, supporting the sales of Ferrari cars in Germany, Great Britain and Switzerland and certain other European countries by offering innovative vehicle financing solutions to Ferrari customers. The funding of FFS GmbH has been provided by FCA Bank, which is also the consolidating entity. At December 31, 2017, FFS’s portfolio of financial receivables was €733 million in aggregate, almost entirely in the Americas. Research and Development We engage in research and development activities aimed at improving the design, performance, safety, efficiency and reliability of our cars. Our research and development center is in Maranello and, at December 31, 2017, included approximately 450 employees who are part of our broader technology team. Our personnel support product development efforts and have expertise in a number of disciplines, including mechanical, electrical, materials, computer science and chemical engineering. We capitalized development costs of €185 million in 2017, €141 million in 2016, and €154 million in 2015. Achieving the most efficient combination of lightweight materials and optimal weight distribution gives our cars their superior longitudinal and lateral driving dynamics. We employ a range of technologies to reduce car weight. For our range models we are currently developing an aluminum lightweight chassis and body, which is competitive with a carbon fiber chassis. For LaFerrari we are currently using state of the art carbon fiber technologies, which we developed in conjunction with our Formula 1 research and development team. We are currently developing a new architecture, aimed at further reducing car weight and increasing performance, and thus improving stiffness and reducing noise, vibration and harshness (NVH), among other things. Powertrain The powertrain is a core area of our research and development. As with other research and development areas, powertrain research benefits from a constant exchange between the Formula 1 team and designers of our Sports and GT cars. Engines Our V12 engines’ output ranges from 690 hp (in the GTC4 Lusso), to 780 hp (in the F12tdf), and up to 800 hp (in the LaFerrari Aperta). This range highlights our versatility in developing V12 aspirated engines, as there are no other carmakers which currently boast such specific high power ratios. With the California T and the 488 GTB, we transitioned from aspirated V8 engines to turbo charged engines. This allowed us to increase specific engine power more than 20 percent, while reducing emissions by up to eight percent. All Ferrari turbo engines are designed to have the same throttle response delivered by a naturally aspirated car. To achieve this goal we are investing in cutting edge turbo charging technologies (such as aluminum-titanium-alloys and ball bearings), with our strategic partner IHI. 94 95 ANNUAL REPORT OVERVIEW OF OUR BUSINESS To further improve efficiency with respect to emissions and performance we continuously improve on our engines, researching new materials with higher specifications for friction, thermal and mechanical stress. We are also investing in technologies that improve the combustion process, with research focusing on high pressure injection. Transmissions Our 7-shift double clutch gearbox is a core element of Ferrari powertrains. The architecture of the gearbox, combined with the shifting technologies developed by Ferrari, allow for one of the fastest and most performance orientated shifts on the market. The 488 GTB demonstrates the potential of this gearbox, reaching the 4th gear limiter in full acceleration in six seconds. Vehicle dynamics Suspension, braking systems and tires are key elements of vehicle dynamics. Our vehicle suspensions allow for a very rigid and direct force transmission which increases the response of the car, and we combine those with magnetorheological ride dampers. We continuously collaborate with our strategic partners in our effort to increase damper dynamics. All Ferraris are equipped with carbon ceramic brakes, renowned for superior breaking performance. With the 458 Speciale we introduced a new generation of carbon ceramic brakes with even higher breaking performance and reduced weight, which have also been equipped on the F12tdf and we plan to introduce such brakes on our future sports cars. Aerodynamics We are constantly seeking to improve the aerodynamics of our models, working specifically on drag resistance and downforce. We also use passive and active spoiler systems. Thanks to our collaboration with the racing team, who assist with calculations and testing, we believe we are able to develop innovative solutions in shorter timeframes. Hybrid technology With LaFerrari we developed not only a supercar with cutting edge engine performance and driving dynamics, but also a highly sophisticated hybrid car. In conjunction with our partner Magneti Marelli, we developed a compact electric power unit and DC/DC charger. The battery was developed in conjunction with our Formula 1 team, who has extensive know-how in high performance powertrains. The LaFerrari project greatly expanded our knowledge of powertrain electrification and its implications on performance and efficiency. We actively work to improve performance and efficiency of electric powertrains and to extend the range of electric components in our cars (e.g. electric power steering). We are undertaking an important program to understand the potential of hybrid technology and we are researching how to improve the performance and driving experience of our cars without losing fuel efficiency advantages. We are working intensively to develop an efficient package introducing new electrified components. While maintaining the compactness of the car, we are also seeking to lower the weight as a low center of gravity is crucial not only to performance but also for maximizing the overall driving experience. In our research program we are also considering new technologies outside powertrain. Intellectual Property We own a number of design and utility patents and registered designs. We expect the number to grow as we continue to pursue technological innovations and to develop our design and brand activities. We file patent applications in Europe, and around the world (including in the United States) to protect technology and improvements considered important to our business. No single patent is material to our business as a whole. We also own a number of registered trademarks, designs and patents, including approximately 460 trademarks (word or figurative), registered in several countries and across a number classes. In particular, we ensure that the maximum level of protection is given to the following iconic trademarks, for which we own a total of approximately 4,500 applications/registrations in more than 128 countries, in most of the main classes for goods and services: “Ferrari” (word) “Ferrari” logotype: the “Prancing Horse” (figurative): • • • • • • • • 96 97 ANNUAL REPORT OVERVIEW OF OUR BUSINESS • the trademark (figurative): • the racing shield (figurative): • Scuderia Ferrari (word and figurative): Our Sports and GT car models and Formula 1 single-seater models are also registered as trademarks (and logotypes) and we also register their designs and domain names. The protection of intellectual property is also increasingly important in connection with our design and brand activities. Therefore, we adopt and follow internal processes and procedures to ensure both that all necessary protection is given to our intellectual property rights and that no third party rights are infringed by us. In addition, we are particularly active in seeking to limit any counterfeiting activities regarding our Ferrari branded products around the world. To reach this goal we closely monitor trademark applications and domain names worldwide, actively interact with national and local authorities and customs and avail ourselves of a network of experienced outside counsels. Properties Our principal manufacturing facility is located in Maranello (Modena), Italy. It has an aggregate covered area of approximately 630 thousand square meters. Our Maranello plant hosts our corporate offices and most of the facilities we operate for the design, development and production of our Sports and GT cars, as well as of our Formula 1 single-seaters. (See “Overview of our Business—Design, Development and Manufacturing—Production Process”). Except for some leased technical equipment, we own all of our facilities and equipment in Maranello. Between 2003 and 2008 most of the buildings in Maranello, including the paint shop building and the production building, were either rebuilt or renovated. In 2015 we completed construction of the new building entirely dedicated to our Formula 1 team and racing activities, as well as the new wind tunnel 4WD. Adjacent to the plant is our approximately 3,000 meter Fiorano track, built in 1972 and remodeled in 1996. The track also houses the Formula 1 logistics offices. Additional facilities in Maranello include a product development center, a hospitality area and the Ferrari museum. We also own the Mugello racing circuit in Scarperia, near Florence, which we rent to racing events organizers (see “Overview of our Business—Formula 1 Activities—The Mugello Circuit”). We own a second plant in Modena, named Carrozzeria Scaglietti. At this approximately 26 thousand square meter plant we manufacture aluminum bodyworks and chassis for our regular range, special series and prototype cars. The total carrying value of our property, plant and equipment at December 31, 2017 was €710,260 thousand. Employees Human capital is a crucial factor in our success, building on our position as a global leader in the luxury performance car sector and creating long-term, sustainable value. To recognize excellence, encourage professional development and create equal opportunities, we adopt a number of initiatives, such as our Graduates Project, aimed at identifying and recruiting graduates from the world’s best universities; our appraisal system to assess our manager, professional and white collar employees, through performance management metrics; our talent management and succession planning; training and skill-building initiatives; employee satisfaction and engagement surveys, including our so-called “Pit Stop” and “Pole Position” programs; and flexible work arrangements, commuting programs and a dedicated welfare program, Formula Uomo, which includes, among other programs, Formula Benessere Program (offering medical assistance to employees and their families) and Formula Estate Junior (offering Summer Campus to the children of employees). At December 31, 2017, we had a total of 3,380 employees, including 92 executives. Of these, approximately 3,196 were based at our Maranello facility, and approximately 184 in offices around the world (including 8 executives), mostly in North America and China. White collar employees Italy Rest of the world Blue collar employees Italy Rest of the world Executives Total At December 31, 2017 2016 2015 1,531 1,358 173 1,757 1,754 3 92 1,407 1,216 191 1,751 1,748 3 90 1,304 1,143 161 1,607 1,604 3 87 3,380 3,248 2,998 98 99 ANNUAL REPORT OVERVIEW OF OUR BUSINESS The increase in employees in recent periods principally related to a strengthening of technical competencies, particularly within our GT cars development activities. Furthermore, in 2012, we began producing engines for the new Maserati cars. The planned production volumes required adoption of innovative work organization mechanisms, in terms of number of shifts and hours, thus enabling effective management of a varying production demand. The new activity required the addition of 253 workers, who are currently on agency contracts. These workers are not included in the total Ferrari employee head count referenced above. Approximately 11 percent of the employees were trade union members in 2017. Our employees’ principal trade unions are Federazione Italiana Metalmeccanici (FIM-CISL), Federazione Italiana Sindacati Metalmeccanici e Industrie Collegate (FISMIC), Unione Italiana Lavoratori Metalmeccanici (UILM-UIL) and Federazione Impiegati Operai Metallurgici (FIOM-CGIL). All of our employees are covered by collective bargaining agreements. Our managers are represented by the Italian trade union, Federmanager, and are subject to a collective bargaining agreement renewed on March 2, 2016 and in effect through December 31, 2017. Our other employees are covered by the collective bargaining agreement entered into by FCA and FIM-CISL, UILM-IUL, FISMIC, UGL and Associazione Quadri e Capi FIAT, which will expire on December 31, 2018, and by a Ferrari Enterprise Bargaining Agreement signed on June 22, 2016 by Ferrari and FIM, UILM and FISMIC, which will expire on December 31, 2019. This collective bargaining contract provides, among other things, for the payment of bonuses linked to performance up to a maximum of approximately €5,720 gross per year payable in three installments. In addition to the collective agreements, we have individually negotiated agreements with several of our managers and other key employees providing for long-term incentives, exclusivity and non-compete provisions. Regulatory Matters We manufacture and sell our cars around the world and our operations are therefore subject to a variety of laws and regulations relating to environmental, health and safety and other matters. These laws regulate our cars, including their emissions, fuel consumption and safety, as well as our manufacturing facilities and operations, setting strict requirements on emissions, treatment and disposal of waste, water and hazardous materials and prohibitions on environmental contamination. Our vehicles, together with the engines that power them, must comply with extensive regional, national and local laws and regulations, and industry self-regulations (including those that regulate vehicle safety). However, we currently benefit from certain regulatory exemptions, because we qualify as a SVM or similar designation in most of the jurisdictions where we sell cars (including the United States). As outlined below, these exemptions provide a range of benefits, from less stringent emissions caps and compliance date extensions, to exemptions from zero emission vehicle production requirements. We are in substantial compliance with the relevant regulatory requirements affecting our facilities and products around the world. We constantly monitor such requirements and adjust our operations as necessary to remain in compliance. Greenhouse gas/CO2 /fuel economy legislation Current European legislation limits fleet average greenhouse gas emissions for new passenger cars to 130 grams of CO2 per kilometer. This target, implemented gradually between 2012 and 2015, calls for 65 percent of the manufacturer’s newly registered cars to comply with the 130 grams limit in 2012, rising to 75 percent in 2013, 80 percent in 2014, and 100 percent from 2015 onwards. Due to our SVM status we benefit from a derogation from the 130 grams per kilometer emissions requirement available to small volume and niche manufacturers. Pursuant to that derogation, we are instead required to meet yearly CO2 emissions targets, beginning in 2012, reaching a target level of 290 grams per kilometer in 2016 for our fleet of EU-registered vehicles that year. In 2015 we exceeded our alternative target and therefore we were required to pay a penalty of €411 thousand. In 2014, the European Union set new 2020 emissions targets, calling for 95 percent of a manufacturer’s full fleet of new passenger cars registered in the EU in 2020 to average 95 grams of CO2 per kilometer, rising to 100 percent of the fleet in 2021. The 2014 regulation extends the small volume and niche manufacturers derogation. Therefore, in December 2015, we submitted to the EU Commission our proposed CO2 emissions target levels for the 2017-2021 period and the EU Commission approved our derogation in October 2016. Pursuant to that derogation, we are required to meet certain CO2 emissions target levels in the 2017-2021 period, reaching a target of 277 grams per kilometer in 2021 for our fleet of EU-registered cars that year. In the United States, both Corporate Average Fuel Economy (“CAFE”) standards and greenhouse gas emissions (“GHG”) standards are imposed on manufacturers of passenger cars. Because the control of fuel economy is closely correlated with the control of GHG emissions, the United States Environmental Protection Agency (“EPA”) and the National Highway Traffic Safety Administration (“NHTSA”) have sought to harmonize fuel economy regulations with the regulation of GHG vehicle emissions (primarily CO2). These agencies have set the federal standards for passenger cars and light trucks to meet an estimated combined average fuel economy (CAFE) level that is equivalent to 35.5 miles per U.S. gallon for 2016 model year vehicles (250 grams CO2 per mile). In August 2012, these agencies extended this program to cars and light trucks for model years 2017 through 2025, targeting an estimated combined average emissions level of 163 grams per mile in 2025, which is equivalent to 54.5 miles per gallon. In November 2016, the EPA determined that the model years 2022-2025 standards, adopted by EPA in the 2012 final rule establishing the model year 2017-2025 standards, remain appropriate. In March 2017, EPA announced its intention to reconsider this decision, extending the review period for GHG standards definition. In July 2017, the NHTSA published a notice of intent to prepare an Environmental Impact Statement (“EIS”) for Model Year 2022-2025 Corporate Average Fuel Economy standards, inviting stakeholders to provide comments. The EIS purpose is to define the potential environmental impacts of the Model Year 2022-2025 Fuel Economy standards and represents the first step of the rulemaking process relating to those model years. For model years 2017-2025, the EPA allows a SVM, defined as manufacturers with less than 5,000 yearly unit sales in the United States, to petition for a less stringent standard. Based on our operational independence from FCA, the EPA has granted us SVM status. We have therefore petitioned the EPA for alternative standards for the 2017-2021 model years, which are aligned to our technical and economic capabilities. In September 2016, we petitioned NHTSA for recognition as an independent manufacturer of less than 10,000 vehicles produced globally, and we proposed alternative CAFE standards, for Model Year 2017, 2018 and 2019. In December, 2017, we amended the petition by proposing alternative CAFE standards for Model Year 2016, 2017 and 2018, covering also the 2016 Model Year. NHTSA have not yet responded to our petition. We will need in the future to file with NHTSA a petition for 2019-2020 and 2021 model years. If our petitions are rejected, 100 101 ANNUAL REPORT OVERVIEW OF OUR BUSINESS we will not be able to benefit from the more favorable CAFE standards levels which we have petitioned for and this may require us to purchase additional CAFE credits in order to comply with applicable CAFE standards. Additional stringency of evaporative emissions also requires more advanced materials and joints solutions to eliminate fuel evaporative losses, all for much longer warranty periods (up to 150,000 miles in the United States). In February 2010, the California Air Resources Board (“CARB”) enacted regulations that deem manufacturers of vehicles for model years 2012-2016 which are in compliance with the EPA greenhouse gas emissions regulations to also be in compliance with California’s greenhouse gas emission regulations. In November 2012, the CARB extended these rules to include model years 2017-2025. In 2017 CARB performed a technical assessment regarding greenhouse gas standards for 2022 through 2025 Model Years, in parallel with EPA and NHTSA, the purpose of which is to verify whether the standards defined in 2012 can be still considered appropriate. While Europe and the United States lead the implementation of these fuel consumption/CO2 emissions programs, other jurisdictions typically follow on with adoption of similar regulations within a few years thereafter. In China, for example, Stage III fuel consumption regulations targeted a national average fuel consumption of 6.9L/100km by 2015 and Stage IV targets a national average fuel consumption of 5.0L/100km by 2020. In September 2017 the Chinese government issued the Administrative Measures on CAFC (Corporate Average Fuel Consumption) and NEV (New Energy Vehicle) Credits. This regulation establishes mandatory CAFC requirements, while providing additional flexibility for SVMs (less than 2,000 units/year imported in China) that achieve a certain minimum CAFC yearly improvement rate. Manufactures that exceed the CAFC regulatory ceiling are required to purchase NEV credits. Exhaust and evaporative emissions requirements In 2007, the European Union adopted the latest in a series of more-stringent standards for emissions of other air pollutants from passenger and light commercial vehicles, such as nitrogen oxides, carbon monoxide, hydrocarbons and particulates. These standards were phased in from September 2009 (Euro 5) and September 2014 (Euro 6) for passenger cars. In 2016, the European Union established that Euro 6 limits shall be evaluated through Real Driving Emissions (RDE) measurement procedure and a new test-cycle more representative of normal conditions of use (Worldwide Light Vehicles Test Procedure). These requirements became effective starting in 2017. SVMs (with a worldwide annual production lower than 10,000 units) are required to be compliant to RDE standards starting from 2020. In April 2014, the “Tier 3” Motor Vehicle Emission and Fuel Standards issued by the EPA were finalized. With Tier 3, the EPA has established more stringent vehicle emission standards, requiring significant reductions in both tailpipe and evaporative emissions, including nitrogen oxides, volatile organic compounds, carbon monoxide and particulate matter. Beginning in 2017, the emission standards will be phased in and the requirement on fuel producers to reduce sulfur in gasoline will be effective. The new standards are intended to harmonize with California’s standards for 2015-2025 model years (so called “LEV3”) and will be implemented over the same timeframe as the U.S. federal CAFE and GHG standards for cars and light trucks described above. Because of our status as an operationally independent SVM, Ferrari obtained a longer, more flexible schedule for compliance with these standards under both the EPA and California Program. In addition, California is moving forward with other stringent emission regulations for vehicles, including the Zero Emission Vehicle regulation (ZEV). The ZEV regulation requires manufacturers to increase their sales of zero emissions vehicles year on year, up to an industry average of approximately 15 percent of vehicles sold in the state by 2025. Because we currently sell fewer than 4,500 units in California, we are exempt from these requirements. In response to severe air quality issues in Beijing and other major Chinese cities, in 2016 the Chinese government published a more stringent emissions program (National 6), providing two different level of stringency effective starting from 2020. Moreover autonomous regions and municipalities are allowed to implement in advance this more stringent requirement. To comply with current and future environmental rules related to both fuel economy and pollutant emissions, we may have to incur substantial capital expenditure and research and development expenditure to upgrade products and manufacturing facilities, which would have an impact on our cost of production and results of operation. Vehicle safety Vehicles sold in Europe are subject to vehicle safety regulations established by the EU or by individual Member States. In 2009, the EU established a simplified framework for vehicle safety, repealing more than 50 directives and replacing them with a single regulation aimed at incorporating relevant United Nations standards. This incorporation process began in 2012. With respect to regulations on advanced safety systems, the EU now requires new model cars from 2011 on to have electronic stability control systems and tire pressure monitoring systems (beginning in 2012). Also introduced were regulations on low-rolling resistance tires. From April 2009, the criteria for whole vehicle type approval were extended to cover all new road vehicles, to be phased in over five years depending on the vehicle category. The framework is reviewed periodically, and a revised version of the General Safety Regulation is currently under discussion. As revised, the regulation would mandate new model cars to be compliant, among other things, with to Advanced Driver Assistance Systems (ADAS), pole side impact protection, full overlap frontal crash, small overlap crash requirements. In 2017 the EU published technical requirements for the Emergency Call (eCall) system, mandatory for new model cars starting from 2018. Under U.S. federal law, all vehicles sold in the United States must comply with Federal Motor Vehicle Safety Standards (“FMVSS”) promulgated by the NHTSA. Manufacturers need to provide certification that all vehicles are in compliance with those standards. In addition, if a vehicle contains a defect that is related to motor vehicle safety or does not comply with an applicable FMVSS, the manufacturer must notify vehicle owners and provide a remedy at no cost to the consumer. Moreover, the Transportation Recall Enhancement, Accountability, and Documentation Act requires manufacturers to report certain information related to claims and lawsuits involving fatalities and injuries in the United States if alleged to be caused by their vehicles, and other information related to client complaints, warranty claims, and field reports in the United States, as well as information about fatalities and recalls outside the United States. Several new or amended FMVSSs will take effect during the next few years in certain instances under phase-in schedules that require only a portion of a manufacturer’s fleet to comply in the early years of the phase-in. These include an amendment to the side impact protection requirements that added several new tests and performance requirements (FMVSS No. 214), an amendment to roof crush resistance requirements (FMVSS No. 216), and a new rule for ejection mitigation requirements (FMVSS No. 226). Because of our status as SVM, Ferrari is required to be compliant at the end of the phase-in period. Under the Transportation Recall Enhancement, Accountability, and Documentation Act (“TREAD”), we must log certain information, including incidents involving death or injury, with the NHTSA. In 2014 we paid a $3.5 million civil penalty to the NHTSA for reporting failures related to the period 2011-2014 and for failure 102 103 ANNUAL REPORT OVERVIEW OF OUR BUSINESS OPERATING RESULTS to comply with early warning reporting requirements in connection with three fatalities. We have upgraded our procedures for compliance. Results of Operations Consolidated Results of Operations – 2017 compared to 2016 and 2016 compared to 2015 The following is a discussion of the results of operations for the year ended December 31, 2017 as compared to the year ended December 31, 2016, and for the year ended December 31, 2016 as compared to the year ended December 31, 2015. The presentation includes line items as a percentage of net revenues for the respective periods presented to facilitate year-over-year comparisons. For the years ended December 31, 2017 Percentage of net revenues 2016 Percentage of net revenues 2015 Percentage of net revenues 100.0% 48.3% 9.6% 19.2% 0.2% 0.1% 22.7% 0.9% 21.9% 6.1% 15.8% (€ million, except percentages) 3,105 1,580 295 614 24 3 595 28 567 167 400 100.0% 50.9% 9.5% 19.8% 0.8% 0.2% 19.2% 0.9% 18.3% 5.4% 12.9% 3,417 1,651 329 657 7 2 775 29 746 209 537 2,854 1,499 339 562 10 — 444 10 434 144 290 100.0% 52.5% 11.9% 19.7% 0.4% — 15.6% 0.4% 15.2% 5.0% 10.2% Net revenues Cost of sales Selling, general and administrative costs Research and development costs Other expenses, net Result from investments EBIT Net financial expenses Profit before taxes Income tax expense Net profit On July 14, 2015, we issued a safety recall report with the NHTSA, after being notified by Takata Corporation that certain driver’s side airbags manufactured by Takata, installed in certain model year 2015 cars, were defective. The recall impacts 814 of our model year 2015 cars sold in the United States and also relates to up to an additional 1,600 model year 2015 cars in other regions. The defect, caused by pre-assembled airbags supplied by Takata, relates to insufficient gluing of the airbag cover and a possible incorrect installation of the driver’s airbag cushion. The replacement component has been produced with improved gluing methods as well as improved airbag assembly measures. We have implemented a recall to remedy this safety defect. In addition, Ferrari cars were included within the NHTSA Consent Order Amendment dated May 4, 2016 with Takata (the “Amended Consent Order”) due to a defect which may arise in the non-desiccated Takata passenger airbag inflators mounted on certain Ferrari cars. As a result of such Amended Consent Order, Ferrari filed a Part 573 Defect Information Report on May 23, 2016 with the NHTSA and has initiated a global recall relating to certain cars produced between 2008 and 2011. In December 2016, the NHTSA issued a Third Amendment to the Coordinated Remedy Order (“ACRO”) which included the list of Ferrari vehicles sold in the United States up to model year 2017 to be recalled. As a consequence of the ACRO, Ferrari has decided to extend the Takata global recall campaign to all vehicles worldwide mounting non-desiccated Takata passenger airbag inflators. In January 2017 Ferrari, in accordance with the Amended Consent Order and the ACRO, filed with the NHTSA a Part 573 Defect Information Report to include Model Year 2012 Zone A vehicles. In January 2018, Ferrari, in accordance with the Amended Consent Order and the ACRO, also filed with the NHTSA a Part 573 Defect Information Report to include Model Year 2013 Zone A vehicles. As a result of the ACRO and the decision to extend the worldwide Takata airbag inflator recall, Ferrari increased its provisions for the estimated charges for Takata airbag inflators recalls to €37 million in the year ended December 31, 2016 to cover the cost of the worldwide global Takata recall due to uncertainty of recoverability of the costs from Takata. At December 31, 2017 the provision amounted to €35 million. In December 2015, we issued two safety calls reports with the NHTSA, after learning that certain low pressure fuel lines manufactured and supplied by Dytech — Dynamic Flued Technologies S.p.A. were defective. The recall impacts 185 California T vehicles and 119 488 GTB vehicles sold in the United States and 65 California T Vehicles and 199 488 GTB vehicles sold in other regions. The defect was due to an improper coating treatment made by the supplier Dytech on the metallic part of the fuel pipe where it connects to the fuel pump. The replacement component has been produced with the proper coating. We have implemented a separate recall on each model to remedy this safety defect. In 2016, the NHTSA published Phase II draft guidelines for driver distraction, for portable and aftermarket devices, and the associated compliance costs may be substantial. These guidelines, together with previously published Phase I provisions focus, among other things, on the need to modify the design of car devices and other driver interfaces to minimize driver distraction. Compliance with these new requirements, as well as other possible future NHTSA requirements, is likely to be difficult and/or costly. We are in the process of evaluating these guidelines and their potential impact on our results of operations and financial position and determining what steps and/or countermeasures, if any, we will need to make. In 2017 Chinese authorities published the updated version of the current General Safety Regulation, becoming the driver market for the Event Data Recorder mandatory installation starting from 2021. Technical requirements will be defined through a dedicated standard within 2018. 104 105 ANNUAL REPORT OPERATING RESULTS Net Revenues The following table sets forth an analysis of our net revenues for the periods indicated: For the years ended December 31, Increase/(Decrease) 2017 Percentage of net revenues 2016 Percentage of net revenues 2015 Percentage of net revenues 2017 vs. 2016 2016 vs. 2015 (€ million, except percentages) Cars and spare parts (1) Engines (2) Sponsorship, commercial and brand (3) Other (4) Total net revenues 2,456 373 71.9% 2,180 338 10.9% 70.2% 2,080 219 10.9% 72.9% 7.7% 276 35 12.7% 10.5% 100 119 4.8% 54.5% 494 14.5% 488 15.7% 441 15.5% 6 1.1% 47 10.7% 94 3,417 2.7% 99 100.0% 3,105 3.2% 114 100.0% 2,854 3.9% 100.0% (5) 312 (5.1)% 10.0% (15) (13.8)% 8.8% 251 (1) Includes net revenues generated from shipments of our cars, including any personalization net revenues generated on these cars and sales of spare parts. (2) Includes net revenues generated from the sale of engines to Maserati for use in their cars and net revenues generated from the rental of engines to other Formula 1 racing teams. (3) Includes net revenues earned by our Formula 1 racing team, through sponsorship agreements and our share of the Formula 1 World Championship commercial revenues, and net revenues generated through the Ferrari brand, including merchandising, licensing and royalty income. (4) Primarily includes interest income generated by the Ferrari Financial Services entities and net revenues from the management of the racetrack. 2017 compared to 2016 Net revenues for 2017 were €3,417 million, an increase of €312 million, or 10.0 percent (an increase of 11.2 percent on a constant currency basis), from €3,105 million for 2016. The increase in net revenues, including the positive impact of foreign currency hedging instruments, was attributable to the combination of (i) a €276 million increase in cars and spare parts net revenues, (ii) a €35 million increase in engines net revenues and (iii) a €6 million increase in sponsorship, commercial and brand net revenues, partially offset by (iv) a €5 million decrease in other net revenues. Cars and spare parts Cars and spare parts net revenues were €2,456 million for 2017, an increase of €276 million, or 12.7 percent, from €2,180 million for 2016. The increase was primarily attributable to a €249 million increase in net revenues from range and special series cars and spare parts, as well as a €27 million increase in net revenues from supercars and limited edition cars. The €249 million increase in net revenues from range and special series cars and spare parts was principally attributable to an increase in shipments of approximately 360 cars (excluding the LaFerrari and the LaFerrari Aperta) and positive mix, along with a greater contribution from personalization programs and pricing increases. Shipments of V12 range and special series models increased by approximately 25 percent, primarily attributable to an increase in shipments of the GTC4Lusso and our first shipments of the newly launched 812 Superfast which is now being sold in most of our markets, partially offset by the phase-outs of the F12berlinetta and the FF, as well as the F12tdf, which finished its limited series run. Shipments of V8 range models were in line with 2016, as increases in shipments of the 488 family and the GTC4Lusso T were substantially offset by the phase-out of the California T. The €249 million increase in net revenues from range and special series cars and spare parts reflects increases in all four of our major geographical markets, including (i) a €146 million increase in EMEA, (ii) a €40 million increase in Americas, (iii) a €36 million increase in Rest of APAC, and (iv) a €27 million increase in China, Hong Kong and Taiwan (on a combined basis). The €146 million increase in EMEA net revenues was primarily attributable to an increase in shipments and a greater contribution from personalization programs. The increase in shipments was driven by double- digit growth in shipments in Italy, France, and the UK, as well as mid-single digit growth in Germany, Switzerland and Other EMEA. The increase in shipments was primarily related to the 488 and GTC4Lusso families, as well as our first shipments of the newly launched 812 Superfast, which commenced in EMEA in the third quarter of 2017. This increase was partially offset by the phase-outs of the California T and F12berlinetta, as well as the F12tdf. A decrease in net revenues in the Middle East was primarily due to a reallocation of shipments into different markets triggered by difficult market conditions in the Middle East. The €40 million increase in Americas net revenues was primarily attributable to positive volume and mix, along with a greater contribution from our personalization programs, partially offset by negative foreign exchange impact. In particular, the positive volume was driven by the 488 family and the GTC4Lusso, as well as the entry of the GTC4Lusso T and the 812 Superfast on the market in the fourth quarter of 2017, partially offset by the phase-outs of the California T and F12berlinetta, as well as the F12tdf. The €36 million increase in Rest of APAC net revenues was primarily attributable to increases in Japan and other Rest of APAC, and to a lesser extent in Australia. The increase in Japan was driven by single-digit growth in shipments, primarily due to the GTC4Lusso family, partially offset by the phase-outs of the California T and F12berlinetta as well as negative foreign currency exchange impact. Double-digit growth in shipments was achieved in Australia and Rest of APAC, supported by the 488 and the GTC4Lusso families. The €27 million increase in China, Hong Kong and Taiwan (on a combined basis) net revenues was primarily attributable to a positive mix, driven by the GTC4Lusso family and other V12 models, particularly in China, partially offset by a slowdown in Hong Kong due to our decision to terminate the distributor in 2016 and the new dealership only becoming fully operational in the third quarter of 2017. The €27 million increase in net revenues from supercars and limited edition cars was attributable to shipments of LaFerrari Aperta, partially offset by the phase out of the LaFerrari shipments, which ended in 2016, as well as the non-registered racing car FXX K and the strictly limited edition F60 America completing their limited series run in 2016. 106 107 ANNUAL REPORT OPERATING RESULTS Engines Net revenues generated from engines were €373 million for 2017, an increase of €35 million, or 10.5 percent, from €338 million for 2016. The €35 million increase was mainly attributable to an increase in net revenues generated from the sale of engines to Maserati, driven by a 25 percent increase in the volume of engines shipped, partially offset by a decrease in net revenues from the rental of engines to Formula 1 racing teams due to the termination of the rental agreement with one of the Formula 1 teams. Sponsorship, commercial and brand Net revenues generated from sponsorship, commercial agreements and brand management activities were €494 million for 2017, an increase of €6 million, or 1.1 percent, from €488 million for 2016. The increase was primarily related to an increase in net revenues from sponsorship and brand activities, partially offset by a decrease in Formula 1 net revenues due to our lower ranking in the World Constructors’ Championship in 2016 compared to 2015. Other which was in its 5th year of commercialization, and the phase-out of the FF. Shipments of V8 models increased by 4.8 percent, driven by the 488 GTB and the 488 Spider, which were launched in the first quarter of 2015 and the third quarter of 2015, respectively, partially offset by the phase-out of the 458 family in 2015. The €270 million increase in net revenues from range and special series cars and spare parts reflected increases in all four of our major geographical markets, including (i) €137 million in EMEA, (ii) €89 million in Americas, (iii) €43 million in Rest of APAC and (iv) €1 million in China, Hong Kong and Taiwan (on a combined basis). The €137 million increase in EMEA net revenues was attributable to increases of €60 million in Italy, €23 million in Other EMEA, €21 million in Germany, €11 million in Switzerland, €11 million in France, €8 million in the Middle East and €3 million in the UK. Such increases were primarily attributable to positive effects from volume, our personalization programs and positive mix. In particular, Italy, Other EMEA, Germany and France experienced double-digit growth in shipments, primarily driven by the 488 GTB, the 488 Spider, the F12tdf and the GTC4Lusso, partially offset by the phase-out of the 458 family in 2015. The positive mix effect in EMEA was driven by the F12tdf and the GTC4Lusso. Other net revenues were €94 million for 2017, a decrease of €5 million, or 5.1 percent, from €99 million for 2016. The €5 million decrease in other net revenues was primarily driven by the deconsolidation of the financial services business in Europe since November 2016 following the sale of a majority stake in FFS GmbH to FCA Bank. The €89 million increase in Americas net revenues was primarily attributable to positive effects from volume and mix, our personalization programs, the sale of spare parts and favorable foreign currency exchange. Positive volumes were driven by shipments of the 488 GTB, the 488 Spider and the F12tdf, partially offset by the phase-outs of the 458 family and the FF, while positive mix was driven by strong performance from the F12tdf. 2016 compared to 2015 Net revenues for 2016 were €3,105 million, an increase of €251 million, or 8.8 percent (an increase of 9.4 percent on a constant currency basis), from €2,854 million for 2015. The increase in net revenues, including the positive impact of foreign currency hedging instruments, was attributable to the combination of (i) a €100 million increase in cars and spare parts net revenues, (ii) a €119 million increase in engines net revenues and (iii) a €47 million increase in sponsorship, commercial and brand net revenues, partially offset by (iv) a €15 million decrease in other net revenues. Cars and spare parts Cars and spare parts net revenues were €2,180 million for 2016, an increase of €100 million, or 4.8 percent, from €2,080 million for 2015. The increase was attributable to a €270 million increase in net revenues from range and special series cars and spare parts, which was partially offset by a decrease in net revenues from supercars and limited edition cars. The €270 million increase in net revenues from range and special series cars and spare parts was primarily attributable to an increase in shipments of approximately 540 cars (excluding the LaFerrari and LaFerrari Aperta), positive contribution from our personalization programs and a price increase on certain models starting from the fourth quarter of 2016. Shipments of V12 models increased by 20.2 percent, primarily attributable to shipments of the F12tdf and the GTC4Lusso, which commenced in the fourth quarter of 2015 and the third quarter of 2016, respectively. These effects were partially offset by a decrease in shipments of the F12berlinetta, The €43 million increase in Rest of APAC net revenues was attributable to increases of €30 million in Japan, €11 million in Australia and €2 million in other Rest of APAC. The €30 million increase in Japan was mainly attributable to positive effects from favorable foreign currency exchange, an increase in shipments and our personalization programs. The €11 million increase in Australia was primarily attributable to a double-digit increase in shipments, driven by the 488 GTB, the 488 Spider and the F12tdf, partially offset by a decrease in shipments of the 458 family. The €1 million increase in China, Hong Kong and Taiwan (on a combined basis) net revenues was attributable to increases of €5 million in Taiwan and €4 million in mainland China, partially offset by an €8 million decrease in Hong Kong. The increases in Taiwan and mainland China were primarily attributable to increases in shipments that were driven by the 488 GTB and the 488 Spider. The decrease in Hong Kong was primarily related to our decision to terminate the distributor in Hong Kong. The decrease in net revenues from supercars and limited edition cars was primarily driven by the LaFerrari which finished its limited series production run, partially offset by shipments of our latest limited edition supercar, the LaFerrari Aperta, which was launched in the third quarter of 2016 and celebrated our 70th anniversary in 2017, as well as shipments of the non-registered racing car FXX K and the F60 America, our limited edition V12 open air roadster that commemorated 60 years in the United States. Engines Net revenues generated from engines were €338 million for 2016, an increase of €119 million, or 54.5 percent, from €219 million for 2015. The €119 million increase was mainly attributable to a €68 million increase 108 109 ANNUAL REPORT OPERATING RESULTS in net revenues generated from the sale of engines to Maserati, driven by a 47.2 percent increase in the volume of engines shipped, as well as an increase in net revenues generated from the rental of power units to other Formula 1 teams, primarily as a result of renting power units to three Formula 1 teams for the 2016 season compared with two Formula 1 teams for the 2015 season. Sponsorship, commercial and brand Net revenues generated from sponsorship, commercial agreements and brand management activities were €488 million for 2016, an increase of €47 million, or 10.7 percent, from €441 million for 2015. The increase was primarily related to our participation in the Formula 1 World Championship and in particular as a result of our improved ranking in the World Constructors’ Championship in 2015 compared to 2014, as well as an increase in net revenues from sponsorship and brand related activities. Other Other net revenues were €99 million for 2016, a decrease of €15 million, or 13.8 percent, from €114 million for 2015. The €15 million decrease in other net revenues was primarily driven by other supporting activities, including the deconsolidation of the financial services business in Europe following the sale of a majority stake in FFS GmbH to FCA Bank on November 7, 2016. Cost of sales For the years ended December 31, Increase/(Decrease) 2016 compared to 2015 Cost of sales for 2016 was €1,580 million, an increase of €81 million, or 5.4 percent, from €1,499 million for 2015. As a percentage of net revenues, cost of sales decreased from 52.5 percent in 2015 to 50.9 percent in 2016. The increase in cost of sales was primarily attributable to (i) an increase in costs of €59 million related to increased volumes and our personalization programs, (ii) an increase in costs of €65 million related to the production of engines for Maserati, engines rented to other Formula 1 racing teams, and other supporting activities, and (iii) charges for Takata airbag inflator recalls of €37 million, partially offset by (i) a decrease in costs of €61 million related to product mix and (ii) a decrease in production costs of €19 million, including direct materials savings and amortization and depreciation. The €59 million increase in cost of sales related to volumes and personalization programs was driven by the 488 GTB, the 488 Spider, the F12tdf and the GTC4Lusso. The €65 million increase in cost of sales related to the production of engines for Maserati, engines rented to other Formula 1 racing teams and other supporting activities was driven by a 47.2 percent increase in the volume of engines shipped to Maserati and the rental of power units to three Formula 1 teams for the 2016 season compared with two Formula 1 teams for the 2015 season. The €61 million decrease in costs related to product mix was driven by a decrease in shipments of the LaFerrari, which finished its limited series production run, partially offset by shipments of the LaFerrari Aperta, the F60 America and an increase in the proportion of shipments of V12 models compared to V8 models in our range and special series cars, driven by shipments of the F12tdf and the GTC4Lusso. The €19 million decrease in production costs was driven by the LaFerrari, the phase-out of the 458 family and direct material savings. 2017 Percentage of net revenues 2016 Percentage of net revenues 2015 Percentage of net revenues (€ million, except percentages) 2017 vs. 2016 2016 vs. 2015 Selling, general and administrative costs Cost of sales 1,651 48.3% 1,580 50.9% 1,499 52.5% 71 4.5% 81 5.4% 2017 compared to 2016 Cost of sales for 2017 was €1,651 million, an increase of €71 million, or 4.5 percent, from €1,580 million for 2016. As a percentage of net revenues, cost of sales decreased from 50.9 percent in 2016 to 48.3 percent in 2017. The increase in cost of sales was primarily attributable to (i) increased costs of €58 million driven by an increase in volumes and personalization programs, (ii) increased costs of €46 million driven by an increase in production volumes of engines for Maserati and costs for supporting activities and (iii) an increase in production costs, including amortization and depreciation, of €4 million, partially offset by (iv) the effect of charges in 2016 for Takata airbag inflator recalls of €37 million. The €58 million increase in cost of sales related to volumes and personalization programs was driven by the 488 family, the GTC4Lusso and the 812 Superfast. The €46 million increase in cost of sales related to the production of engines for Maserati and supporting activities was driven by a 25 percent increase in the volume of engines shipped to Maserati. For the years ended December 31, Increase/(Decrease) 2017 Percentage of net revenues 2016 Percentage of net revenues 2015 Percentage of net revenues 2017 vs. 2016 2016 vs. 2015 (€ million, except percentages) 329 9.6% 295 9.5% 339 11.9% 34 11.5% (44) (12.8)% Selling, general and administrative costs 2017 compared to 2016 Selling, general and administrative costs for 2017 were €329 million, an increase of €34 million, or 11.5 percent, from €295 million for 2016. As a percentage of net revenues, selling, general and administrative costs were substantially unchanged. The increase in selling, general and administrative costs was primarily attributable to (i) share-based compensation expense related to the equity incentive plan, (ii) costs related to initiatives for Ferrari’s 70th anniversary, and (iii) costs related to new directly operated Ferrari stores, partially offset by (iv) the costs of the former CEO’s retirement package recognized in 2016 and (v) a decrease in costs due to the deconsolidation of FFS GmbH since November 2016. 110 111 ANNUAL REPORT OPERATING RESULTS 2016 compared to 2015 Selling, general and administrative costs for 2016 were €295 million, a decrease of €44 million, or 12.8 percent, from €339 million for 2015. As a percentage of net revenues, selling, general and administrative costs decreased from 11.9 percent in 2015 to 9.5 percent for 2016. The decrease in selling, general and administrative costs was mainly attributable to (i) advisory costs incurred in 2015 in relation to the initial public offering of €16 million, (ii) a decrease in allowance for doubtful accounts, primarily related to the effects of a provision recorded in 2015 in relation to a former commercial partner of our Formula 1 activities, (iii) a decrease in costs driven by a different ranking in Formula 1 racing, and (iv) the deconsolidation of FFS GmbH, which were partially offset by (i) the costs of the former CEO’s retirement package, (ii) costs related to new directly operated stores, (iii) costs related to the launch of new models and (iv) corporate costs. Research and development costs For the years ended December 31, Increase/(Decrease) 2017 Percentage of net revenues 2016 Percentage of net revenues 2015 Percentage of net revenues 2017 vs. 2016 2016 vs. 2015 (€ million, except percentages) 556 16.3% 510 16.4% 447 15.7% 46 9.2% 63 14.1% from €562 million for 2015. As a percentage of net revenues, research and development costs were 19.8 percent in 2016 compared to 19.7 percent in 2015. The increase in research and development costs was attributable to an increase of €63 million in research and development costs expensed during the year, partially offset by a decrease of €11 million in amortization of capitalized development costs. The €63 million increase in research and development costs expensed during the year was primarily driven by Formula 1 activities and in particular, our efforts related to power unit projects and chassis area, and to a lesser extent, research and development costs on sports and GT cars. The €11 million decrease in amortization of capitalized development costs was primarily attributable to the completion of the LaFerrari limited series production run and the phase-out of the 458 family, partially offset by amortization of capitalized development costs related to our newer model. Other expenses, net For the years ended December 31, Increase/(Decrease) 2017 2016 2015 2017 vs. 2016 2016 vs. 2015 (€ million, except percentages) Other expenses, net 7 24 10 (17) (72.0)% 14 122.0% Research and development costs expensed during the year Amortization of capitalized development costs Research and development costs 2017 compared to 2016 101 2.9% 104 3.4% 115 4.0% (3) (3.4)% (11) (9.4)% 657 19.2% 614 19.8% 562 19.7% 43 7.1% 52 9.3% 2017 compared to 2016 Other expenses, net for 2017 amounted to net other expenses of €7 million, a decrease of €17 million, or 72.0 percent, compared to net other expenses of €24 million for 2016. Research and development costs for 2017 were €657 million, an increase of €43 million, or 7.1 percent, from €614 million for 2016. As a percentage of net revenues, research and development costs were 19.2 percent in 2017 compared to 19.8 percent in 2016. For 2017, other expenses, net included other expenses of €12 million, which mainly related to indirect taxes and miscellaneous expenses, partially offset by other income of €5 million, which mainly related to gains on disposals of property, plant and equipment, rental income and miscellaneous income. The increase in research and development costs was attributable to an increase of €46 million in research and development costs expensed, partially offset by a decrease of €3 million in amortization of capitalized development costs. The €46 million increase in research and development costs expensed during the year was primarily driven by research and development to support the innovation of our product range and components, in particular in relation to hybrid technology, partially offset by a decrease in research and development expenses for Formula 1 activities. 2016 compared to 2015 Research and development costs for 2016 were €614 million, an increase of €52 million, or 9.3 percent, For 2016, other expenses, net included other expenses of €30 million, which mainly related to provisions (primarily due to disputes with a distributor), indirect taxes and miscellaneous expenses, partially offset by other income of €6 million, which mainly related to gains on the disposal of property plant and equipment, rental income and miscellaneous income. 2016 compared to 2015 Other expenses, net for 2016 amounted to net other expenses of €24 million, an increase of €14 million, or 122.0 percent, compared to net other expenses of €10 million for 2015. For 2016, other expenses, net included other expenses of €30 million, which mainly related to provisions (primarily due to disputes with a distributor), indirect taxes and miscellaneous expenses, partially offset by other 112 113 ANNUAL REPORT OPERATING RESULTS income of €6 million, which mainly related to gains on the disposal of property plant and equipment, rental income and miscellaneous income. For 2015, other expenses, net included other expenses of €32 million, which mainly related to provisions, indirect taxes and miscellaneous expenses, partially offset by other income of €22 million, including a €6 million gain on disposal of assets and liabilities related to investment properties and €6 million related to the release of provisions previously recorded in other expenses, as well as rental income and miscellaneous income. Result from investments For the years ended December 31, Increase/(Decrease) 2017 2016 2015 2017 vs. 2016 2016 vs. 2015 (€ million, except percentages) Result from investments 2 3 — (1) (20.5)% 3 n.m. 2017 compared to 2016 revenues from the weakening of foreign currencies against the Euro) and (iv) a decrease of €57 million in other supporting costs, including the effect of charges in 2016 for Takata airbag inflator recalls of €37 million, partially offset by (v) an increase in research and development costs of €43 million and (vi) an increase in selling, general and administrative costs of €34 million. The positive volume impact was attributable to an increase in shipments of approximately 360 cars (excluding the LaFerrari and LaFerrari Aperta), driven by the GTC4Lusso and the 488 families, as well as our first shipments of the newly launched 812 Superfast, together with positive contribution from our personalization programs. These positive effects on volume were partially offset by the phase-outs of the California T and the F12berlinetta, as well as the F12tdf, which finished its limited series run in 2017. The favorable mix impact of €80 million was primarily attributable to an increase in shipments of the LaFerrari Aperta, as well as an increase in shipments of our V12 range and special series models and pricing increases. These positive effects on mix were partially offset by the end of the LaFerrari lifecycle in 2016, as well as the non-registered racing car FXX K and the strictly limited edition F60 America completing their limited series runs in 2016. The increase in EBIT as a percentage of net revenues from 19.2 percent in 2016 to 22.7 percent in 2017 was primarily attributable to the combination of the previously mentioned effects on EBIT above and a decrease in cost of sales as a percentage of net revenues from 50.9 percent in 2016 to 48.3 percent in 2017. Result from investments of €2 million relates to the Group’s proportionate share of FFS GmbH’s net 2016 compared to 2015 profit. 2016 compared to 2015 Result from investments of €3 million in 2016 includes i) the gain on the sale of a majority stake in FFS GmbH to FCA Bank on November 7, 2016, ii) the gain on the fair value measurement of the non-controlling interest retained in FFS GmbH, and iii) the Group’s proportionate share of FFS GmbH’s net profit subsequent to the sale in accordance with the equity method of accounting. EBIT For the years e nded December 31, Increase/(Decrease) 2017 Percentage of net revenues 2016 Percentage of net revenues 2015 Percentage of net revenues 2017 vs. 2016 2016 vs. 2015 (€ million, except percentages) EBIT 775 22.7% 595 19.2% 444 15.6% 180 30.3% 151 33.9% 2017 compared to 2016 EBIT for 2017 was €775 million, an increase of €180 million, or 30.3 percent, from €595 million for 2016. As a percentage of net revenues, EBIT increased from 19.2 percent in 2016 to 22.7 percent in 2017. EBIT for 2016 was €595 million, an increase of €151 million, or 33.9 percent, from €444 million for 2015. As a percentage of net revenues, EBIT increased from 15.6 percent in 2015 to 19.2 percent in 2016. The increase in EBIT was primarily attributable to (i) positive volume impact of €69 million, (ii) positive net foreign currency exchange impact of €64 million (including positive €71 million relating to foreign currency hedging instruments), (iii) positive contribution of €54 million related to an increase in engine shipments to Maserati, engines rented to other Formula 1 racing teams and other supporting activities, including sponsorship, commercial and brand activities, and (iv) a decrease in selling, general and administrative costs of €44 million, which were partially offset by (i) unfavorable product mix of €28 million, and (ii) an increase in research and development costs of €52 million. The positive volume impact of €69 million was attributable to an increase in shipments of approximately 540 cars (excluding the LaFerrari and LaFerrari Aperta), driven by the 488 GTB, the 488 Spider, the F12tdf (all of which were launched in 2015) and the GTC4Lusso (which commenced in the third quarter of 2016), as well as a positive contribution from our personalization programs. The unfavorable product mix of €28 million was primarily attributable to the completion of the LaFerrari limited series production run, the F12berlinetta, which is in its 5th year of commercialization, and the phase-out of the FF, partially offset by the F12tdf, the launch of the LaFerrari Aperta in the third quarter of 2016, shipments of the non-registered racing car FXX K and the F60 America, our limited edition V12 open air roadster that commemorates 60 years in the United States, and a price increase on certain models from the fourth quarter of 2016. The increase in EBIT was primarily attributable to (i) positive volume impact of €67 million, (ii) favorable mix impact of €80 million, (iii) positive net foreign currency exchange impact of €53 million (resulting from positive €101 million relating to foreign currency hedging instruments, partially offset by an adverse impact on The increase in EBIT as a percentage of net revenues from 15.6 percent in 2015 to 19.2 percent in 2016, was primarily attributable to the combination of the previously mentioned effects on EBIT above and a decrease in cost of sales as a percentage of net revenues from 52.5 percent in 2015 to 50.9 percent in 2016. 114 115 ANNUAL REPORT OPERATING RESULTS Net financial expenses to the Tax Cuts and Jobs Act (the “Tax Act”), which was enacted into law in the U.S. on December 22, 2017. For the years ended December 31, Increase/(Decrease) 2017 2016 2015 2017 vs. 2016 2016 vs. 2015 (€ million, except percentages) Net financial expenses 29 28 10 1 5.5% 18 n.m. 2017 compared to 2016 Net financial expenses for 2017 were €29 million compared to €28 million for 2016, representing an increase of €1 million. An increase in (i) net foreign exchange losses and (ii) interest expenses on bonds was substantially offset by (iii) a decrease in interest expenses on bank borrowings, primarily related to the Term Loan and the Bridge Loan which were fully repaid in November 2017 and March 2016, respectively, (iv) financial income related to the Delta Topco option and (v) a gain on the fair value measurement of the Series C Liberty Formula One shares (“Liberty Shares”) subsequent to initial recognition at cost. 2016 compared to 2015 Net financial expenses for 2016 were €28 million compared to €10 million for 2015, representing an increase of €18 million. The increase in net financial expenses was primarily attributable to interest expenses on debt incurred, directly or indirectly, as a result of the Restructuring which took place in October 2015, and in particular, interest expenses relating to the Term Loan, the Bridge Loan (which was fully repaid in March 2016), which were primarily used to repay a portion of the FCA Note and interest expenses, as well as interest expenses on the 2023 Bond. Net financial expenses also included interest expenses on other bank borrowings. Income tax expense For the years ended December 31, Increase/(Decrease) 2017 2016 2015 2017 vs. 2016 2016 vs. 2015 (€ million, except percentages) Income tax expense 209 167 144 42 24.5% 23 16.3% 2017 compared to 2016 Income tax expense for 2017 was €209 million, an increase of €42 million, or 24.5%, from €167 million for 2016. The increase in income tax expense was primarily attributable to an increase in profit before taxes from €567 million in 2016 to €746 million in 2017, partially offset by a decrease in the effective tax rate net of IRAP from 25.8 percent in 2016 to 24.2 percent in 2017. The decrease in the effective tax rate net of IRAP was primarily attributable to the combined effects of a reduction in the corporate income tax rate from 27.5 percent to 24.0 percent (effective from 2017), deductions related to eligible research and development costs and depreciation of fixed assets in accordance with tax regulations in Italy, partially offset by a decrease in net deferred tax assets due The Tax Act includes various changes to the tax law, including a reduction in the corporate income tax rate from 35% to 21% effective January 1, 2018. We recognized the effects of the changes in the tax rate and laws resulting from the Tax Act in 2017, which resulted in a €4.7 million decrease in net deferred tax assets. 2016 compared to 2015 Income tax expense for 2016 was €167 million, an increase of €23 million, or 16.3 percent, from €144 million for 2015. The increase in income tax expense was primarily attributable an increase in profit before taxes from €434 million in 2015 to €567 million for 2016, partially offset by a decrease in the effective tax rate net of IRAP from 30.0 percent in 2015 to 25.8 percent in 2016. The decrease in the effective tax rate net of IRAP was primarily attributable to the combined effects of adjustments to deferred taxes assets and liabilities due to a change in Italian tax law to reduce the corporate income tax rate from 27.5 percent to 24.0 percent (effective from 2017) and additional tax deductions in 2016 on eligible research and development costs and on investments and other expenses, in accordance with Italian tax regulations. Recent Developments See “Subsequent Events and 2018 Outlook”. Liquidity and Capital Resources Liquidity Overview We require liquidity in order to meet our obligations and fund our business. Short-term liquidity is required to purchase raw materials, parts and components for car production, and to fund selling, administrative, research and development, and other expenses. In addition to our general working capital and operational needs, we expect to use cash for capital expenditures to support our existing and future products. We make capital investments mainly in Italy, for initiatives to introduce new products, enhance manufacturing efficiency, improve capacity, and for maintenance and environmental compliance. Our capital expenditure in 2018 is expected to be approximately €550 million, primarily to support continuous product range renewal and research and development expenditure to transition our product portfolio to hybrid technology. We plan to fund our capital expenditure primarily with cash from our operating activities. Our business and results of operations depend on our ability to achieve certain minimum car shipment volumes. We have significant fixed costs and therefore, changes in our car shipment volumes can have a significant effect on profitability and liquidity. Prior to the Separation, which was completed on January 3, 2016, we managed our liquidity through participation in cash management and funding services provided by the treasury functions of the FCA Group. Following the Separation, we terminated such arrangements and we now centrally manage our operating cash management, liquidity and cash flow requirements on a standalone basis with the objective of ensuring effective and efficient management of our funds. We believe that our cash generation together with our current liquidity will be sufficient to meet our obligations and fund our business and capital expenditures. See “Net Debt and Net Industrial Debt” below for additional details relating to the our liquidity. 116 117 ANNUAL REPORT OPERATING RESULTS Cyclical Nature of our Cash Flows Operating Activities — Year Ended December 31, 2017 Our working capital is subject to month to month fluctuations due to, among others, production volumes, activity of our financial services portfolio, timing of tax payments and capital expenditure. In particular, our inventory levels increase in the periods leading up to launches of new models, during the phase out of prior models and at the end of the second quarter when our inventory levels are higher to support the summer plant shutdown. The payment of taxes also affects our working capital. In 2016 our tax payments were higher as it was our first year as a standalone tax group. We paid the first tax advance in relation to 2016 taxes at the end of the second quarter of 2016 and the second advance in the fourth quarter of 2016. Also in 2016, we settled our 2015 tax balance from the FCA Group tax consolidation. In the second quarter of 2017, we paid the remaining balance of 2016 taxes as well as the first advance in relation to 2017 taxes, and we paid the second advance in the fourth quarter of 2017. Our capital expenditure requirements are, among other things, influenced by the timing of the launch of new models and, in particular, our development costs peak in periods when we develop a significant number of new models to renew or refresh our product range. Going forward, our capital expenditure will also be influenced by research and development expenditure to support product range expansion. In 2018 and future periods we expect that our levels of capital expenditure will increase as we continue our investment in hybrid technology. Capital expenditure is also influenced by the timing of research and developments costs for our Formula 1 activities, for which expenditure is generally higher in the first and last quarter of the year. We generally receive payment for cars between 30 and 40 days after the car is shipped (except when we provide dealer financing or sell invoices to a factor) while we tend to pay most suppliers between 90 and 105 days after we receive the raw materials or components. Additionally, we also receive advance payments from our customers, mainly for our supercars and limited edition cars. We maintain sufficient inventory of raw materials and components to ensure continuity of our production lines but delivery of most raw materials and components takes place monthly or more frequently in order to minimize inventories. The manufacture of one of our cars typically takes between 30 and 45 days, depending on the level of automation of the relevant production line, and the car is generally shipped to our dealers three to six days following the completion of production, although to ensure prompt deliveries in certain regions we may warehouse cars in local markets for longer periods of time. As a result, we tend to receive payment for cars shipped before we are required to make payment for the raw material and components used in manufacturing the cars. Cash Flows The following table summarizes the cash flows from/(used in) operating, investing and financing activities for each of the years ended December 31, 2017, 2016 and 2015. For additional details of our cash flows, see our Consolidated Financial Statements included elsewhere in this Annual Report. Cash flows from operating activities Cash flows used in investing activities Cash flows used in financing activities Translation exchange differences Total change in cash and cash equivalents For the years ended December 31, 2015 2016 2017 663 (379) (85) (9) 190 (€ million) 1,005 (379) (411) 1 275 707 (317) (351) 10 49 For the year ended December 31, 2017, our cash flows from operating activities were €663 million, primarily the result of: (i) profit before tax of €746 million, adjusted to add back €261 million of depreciation and amortization expense, €39 million of other non-cash expenses and income (including net gains on disposals of property, plant and equipment and intangible assets as well as non-cash result from investments), €29 million of net finance costs and €13 million in provisions accrued. Other non-cash expenses were primarily attributable to share-based compensation expense under the equity incentive plan and equity-settled Non-Executive Directors’ compensation. These cash inflows were partially offset by: (i) €73 million related to cash absorbed by the change in other operating assets and liabilities, primarily attributable to a decrease in advances for the LaFerrari Aperta in 2017, partially offset by advances received for the Ferrari J50; (ii) €61 million related to cash absorbed by the net change in inventories, trade payables and trade receivables. In particular, the movement was attributable to (a) cash absorbed by inventory of €88 million driven by projected volume growth in line with our 2018 production outlook, and (b) cash absorbed by trade receivables of €2 million, partially offset by (c) cash generated from trade payables of €29 million, driven by an increase in volumes; (iii) €44 million related to cash absorbed from receivables from financing activities driven by an increase in the financial services portfolio in the United States; (iv) €32 million of net finance costs paid; and (v) income tax paid of €215 million, primarily related to the payment of the remaining balance of 2016 taxes and advances of 2017 taxes. Operating Activities — Year Ended December 31, 2016 For the year ended December 31, 2016, our cash flows from operating activities were €1,005 million, primarily the result of: (i) profit before tax of €567 million, adjusted to add back €248 million of depreciation and amortization expense, €82 million in provisions and €28 million of net finance costs, partially offset by €41 million related to other non-cash expenses and income and net gains on disposal of property, plant and equipment and intangible assets, as well as €3 million non-cash result from investments. The €82 million in provisions accrued was primarily attributable to (a) a warranty and recall campaigns provision of €60 million, of which €37 million related to the Takata airbag inflator recalls and the remainder primarily related to an increase in volumes, and (b) other risks of €22 million, primarily related to disputes with a distributor; (ii) €405 million related to cash generated by a decrease in receivables from financing activities, primarily 118 119 ANNUAL REPORT OPERATING RESULTS attributable to a cash payment of €432 million received in November 2016 following the sale by the Group of the majority stake in FFS GmbH to FCA Bank, as a result of which FFS GmbH was deconsolidated by the Group and the funding of FFS GmbH is being directly provided by FCA Bank (see Note 17 to the Consolidated Financial Statements), partially offset by an increase in the financial services portfolio in the United States; and (iii) €7 million relating to cash generated by other operating assets and liabilities, which benefited by approximately €69 million from advances received, mainly related to the LaFerrari Aperta. These cash inflows were partially offset by: (i) €20 million in net finance costs paid; (ii) €16 million related to cash absorbed by the net change in inventories, trade payables and trade receivables. In particular, the movement was attributable to (a) cash absorbed by inventory of €33 million, (b) cash absorbed by trade receivables of €89 million, partially offset by (c) cash generated from trade payables of €106 million, all of which were driven by an increase in volumes and Maserati engines; and (iii) income tax paid of €252 million, primarily related to payments of tax advances on 2016 taxes and the settlement of the 2015 tax balance from the FCA Group tax consolidation. Operating Activities — Year Ended December 31, 2015 For the year ended December 31, 2015, our cash flows from operating activities were €707 million, primarily the result of: (i) profit before tax of €434 million, adjusted to add back €275 million of depreciation and amortization expense, €51 million in provisions accrued, €32 million related to other non-cash expenses and income and net gains on disposal of property, plant and equipment and intangible assets, and €10 million of net finance costs. The €51 million in provisions accrued was composed of (a) warranty provision of €33 million, primarily related to the increase in cars shipped, and to a lesser extent, a change in mix driven by increased shipments of the LaFerrari and the FXX K, which have higher warranty costs compared to range and special series cars, (b) legal proceedings and disputes of €9 million, and (c) other risks and charges of €9 million. The €32 million related to other non-cash expenses and income and net gains on disposal of property, plant and equipment and intangible assets primarily related to the allowances for doubtful accounts of trade and financial receivables and the inventory provision; (ii) €121 million related to cash generated by a decrease in receivables from financing activities, primarily attributable to the full reimbursement of the financing of inventory related to the establishment of the Maserati standalone business in China, which at December 31, 2014 was equal to €147 million, and the sale of the financial assets portfolios of Ferrari Financial Services S.p.A. and Ferrari Financial Services Japan KK, partially offset by an increase of the financial services portfolio in the USA. These cash inflows were partially offset by: receivables. In particular, the movement was driven by (a) cash absorbed by trade payables of €46 million, mainly due to the full production of the LaFerrari in 2014 while at the end of 2015 the product lifecycle was nearing completion and shipments are planned to be completed in the first quarter of 2016, (b) cash absorbed by inventories of €3 million, consistent with increased volumes, partially offset by (c) cash generated from trade receivables of €16 million mainly due to collections of related party receivables; (ii) €25 million relating to cash absorbed by other operating cash flows, primarily attributable to the net change in other operating assets and liabilities; (iii) €13 million in net finance costs paid; and (iv) income tax paid of €145 million. Investing Activities — Year Ended December 31, 2017 For the year ended December 31, 2017, our net cash used in investing activities was €379 million, primarily the result of: (i) €392 million of capital expenditures, mainly including €189 million related to additions to property, plant and equipment and €203 million relating to intangible assets. For a detailed analysis of additions to property, plant and equipment and intangible assets see “—Capital Expenditures” below. These cash outflows were partially offset by: (i) €8 million of proceeds from exercising the Delta Topco option; (ii) €5 million of proceeds from the sale of property, plant and equipment and intangible assets. Investing Activities — Year Ended December 31, 2016 For the year ended December 31, 2016, our net cash used in investing activities was €320 million, primarily the result of: (i) €342 million of capital expenditures, including €176 million related to additions to property, plant and equipment and €166 million relating to additions to intangible assets. For a detailed analysis of additions to property, plant and equipment and intangible assets see “—Capital Expenditures” below; These cash outflows were partially offset by: (i) €19 million of proceeds from the sale of a majority stake in FFS GmbH to FCA Bank; and (ii) €3 million proceeds from the sale of property, plant and equipment and intangible assets. Investing Activities — Year Ended December 31, 2015 For the year ended December 31, 2015, our net cash used in investing activities was €317 million, primarily (i) €33 million related to cash absorbed by the net change in inventories, trade payables and trade the result of: 120 121 ANNUAL REPORT OPERATING RESULTS (i) €356 million of capital expenditures, including €185 related to additions to property, plant and equipment and €171 million relating to additions to intangible assets. For a detailed analysis of additions to property, plant and equipment and intangible assets see “—Capital Expenditures” below; (iii) €212 million related to net repayments of other bank borrowings; (iv) €87 million cash distribution of reserves to holders of our common shares; and These cash outflows were partially offset by: (v) €17 million of dividends paid to non-controlling interests in our Chinese distributor, Ferrari (ii) €37 million of proceeds from the disposal of assets and liabilities related to investment properties; and (iii) €2 million of proceeds from the sale of property, plant and equipment and intangible assets and the net change in investments and other financial assets. International Cars Trading (Shanghai) Co. Ltd; These cash outflows were partially offset by: (i) €491 million of net proceeds related to the issuance of the 2023 Bond (see “Bonds” below); Financing Activities — Year Ended December 31, 2017 (ii) €463 million of proceeds net of repayments related to revolving securitization programs in the USA; For the year ended December 31, 2017, our net cash used in financing activities was €85 million, primarily (iii) €135 million in net proceeds from the settlement of the deposits in FCA Group cash management the result of: (i) €795 million related to the full repayment of the Term Loan, including €100 million of mandatory scheduled payments in June 2017 and €695 million for the full repayment of the remaining balance in November 2017, primarily with the proceeds of the 2021 Bond; (ii) €120 million related to a cash distribution of reserves to holders of our common shares; (iii) €8 million related to the net change in other debt; and pools and liabilities with FCA; (iv) €16 million related to net change in other debt; and (v) €1 million of proceeds from the share premium contribution made by FCA in connection with the Restructuring. Financing Activities — Year Ended December 31, 2015 For the year ended December 31, 2015, net cash used in financing activities was €351 million, primarily (iv) €1 million of dividends paid to non-controlling interests in our Chinese distributor, Ferrari the result of: International Cars Trading (Shanghai) Co. Ltd. These cash outflows were partially offset by: (i) €3,211 million related to net repayments of financial liabilities with FCA, including repayment of the FCA Note for €2,800 million; (i) €694 million of net proceeds related to the issuance of the 2021 Bond (see “Bonds” below), which were used, together with additional cash held, for the full repayment of the Term Loan; (ii) €54 million related to dividends paid to non-controlling interests in our Chinese distributor, Ferrari International Cars Trading (Shanghai) Co. Ltd; (ii) €141 million of proceeds net of repayments related to our revolving securitization programs in the (iii) €11 million related to net repayments of other debt; and USA; and (iii) €4 million of net proceeds of other bank borrowings. Financing Activities — Year Ended December 31, 2016 For the year ended December 31, 2016, net cash used in financing activities was €411 million, primarily the result of: (i) €701 million related to principal repayments of the Term Loan, including voluntary prepayments of €600 million (€300 million in September 2016 and €300 million in December 2016) and mandatory scheduled repayments of €92 million and $9 million in December 2016; (ii) €500 million related to the full repayment of the Bridge Loan; (iv) €8 million related to the acquisition of non-controlling interests of the subsidiary Ferrari Financial Services S.p.A. These cash outflows were partially offset by: (i) €2,119 million related to net proceeds from third-party financial liabilities, including €2,000 million from the new syndicated credit facility, of which €1,500 million under the Term Loan and €500 million under the Bridge Loan were used to repay financial liabilities with FCA, including a portion of the FCA Note, and (ii) €814 million related to the net change in deposits in FCA Group cash management pools, mainly used to repay a portion of the FCA Note. 122 123 ANNUAL REPORT OPERATING RESULTS Net Debt and Net Industrial Debt Net Industrial Debt is the primary measure used by us to analyze our financial leverage and capital structure, and is one of the key indicators, together with Net Debt, we use to measure our financial position. These measures are presented by management to aid investors in their analysis of the Group’s financial position and financial performance and to compare the Group’s financial position and financial performance with that of other companies. Net Industrial Debt is defined as total debt less cash and cash equivalents (Net Debt), further adjusted to exclude the funded portion of the self-liquidating financial receivables portfolio, which is the portion of our receivables from financing activities that we fund with external debt or intercompany loans. The following table sets forth a reconciliation of Net Debt and Net Industrial Debt at December 31, 2017 and 2016. Cash and cash equivalents Total liquidity Bonds Securitizations Borrowings from banks Term Loan Other debt Total debt Net Debt Funded portion of the self-liquidating financial receivables portfolio Net Industrial Debt Cash and cash equivalents At December 31, 2017 2016 (€ million) 648 648 (1,194) (556) (38) — (18) (1,806) (1,158) 685 (473) 458 458 (498) (486) (37) (800) (27) (1,848) (1,390) 737 (653) Cash and cash equivalents were €648 million at December 31, 2017 compared to €458 million at December 31, 2016. The increase in cash and cash equivalents was primarily driven by €284 million of Free Cash Flow, partially offset by €85 million of cash flows used in financing activities. See “Cash Flows” above for further details. Approximately 67% percent of our cash and cash equivalents were denominated in Euro at December 31, 2017. Our cash and cash equivalents denominated in currencies other than the Euro are available mostly to Ferrari S.p.A. and certain subsidiaries which operate in areas other than the United States and Europe. Cash held in such countries may be subject to transfer restrictions depending on the jurisdictions in which these subsidiaries operate. In particular, cash held in China, which amounted to €66 million at December 31, 2017 (€48 million at December 31, 2016), is subject to certain repatriation restrictions and may only be repatriated as dividends. Based on our review, we do not currently believe that such transfer restrictions have an adverse impact on our ability to meet our liquidity requirements. Cash collected from the settlement of receivables or lines of credit pledged as collateral is subject to certain restrictions regarding its use and is principally applied to repay principal and interest of the funding. Such cash amounted to €28.2 million and €19.4 million at December 31, 2017 and 2016, respectively. The following table sets forth an analysis of the currencies in which our cash and cash equivalents were denominated at the dates presented: Euro U.S. Dollar Chinese Yuan Japanese Yen Other currencies Total Total Available Liquidity At December 31, 2017 2016 (€ million) 435 88 62 26 37 648 318 16 58 37 29 458 Our total available liquidity (defined as cash and cash equivalents plus undrawn committed credit lines) at December 31, 2017 was €1,148 million (€958 million at December 31, 2016). The following table summarizes our total available liquidity: Cash and cash equivalents Undrawn committed credit lines Total available liquidity At December 31, 2017 2016 (€ million) 648 500 1,148 458 500 958 The undrawn committed credit lines relate to a revolving credit facility. See “The Facility” below for further details. Borrowings from banks Borrowings from banks at December 31, 2017 mainly relate to financial liabilities of FFS Inc to support the financial services operations, and in particular (i) €29 million (€24 million at December 31, 2016) relating to a U.S. Dollar denominated credit facility for up to $50 million (drawn down for $35 million at December 31, 2017) and bearing interest at LIBOR plus a range of between 65 and 75 basis points; (ii) other borrowings from banks of €9 million (€13 million at December 31, 2016) relating to various short and medium term credit facilities. 124 125 ANNUAL REPORT OPERATING RESULTS Borrowings from banks at December 31, 2016 also included €800 million relating to the Term Loan, which was fully repaid in 2017, primarily with proceeds from the 2021 Bond issued in November 2017. See “The Facility” below. The Facility On November 30, 2015, the Company, as borrower and guarantor, and certain other members of the Group, as borrowers, entered into a €2.5 billion facility with a syndicate of banks (the “Facility”). At inception, the Facility comprised a bridge loan of €500 million (the “Bridge Loan”), a term loan of €1,500 million (the “Term Loan”) and a revolving credit facility of €500 million (the “RCF”). pledge clauses which require that, in case any security interest upon assets of Ferrari is granted in connection with other notes or debt securities with the consent of Ferrari are, or are intended to be, listed, such security should be equally and ratably extended to the outstanding notes, subject to certain permitted exceptions; (ii) pari passu clauses, under which the notes rank and will rank pari passu with all other present and future unsubordinated and unsecured obligations of Ferrari; (iii) events of default for failure to pay principal or interest or comply with other obligations under the notes with specified cure periods or in the event of a payment default or acceleration of indebtedness or in the case of certain bankruptcy events; and (iv) other clauses that are customarily applicable to debt securities of issuers with a similar credit standing. A breach of these covenants may require the early repayment of the notes. As of December 31, 2017 and 2016, Ferrari was in compliance with the covenants of the notes. In December 2015 the Bridge Loan and Term Loan were fully drawn down for the purposes of repaying Securitizations financial liabilities with FCA, including the FCA Note that originated as a result of the Restructuring. In March 2016, the Bridge Loan was fully repaid, primarily using the proceeds from the 2023 Bond (see “Bonds” below). In 2016 and 2017 the Company made scheduled payments and voluntary prepayments, funded in part with the proceeds of the 2021 Bond described under “Bonds” below, to fully repay the Term Loan. At December 31, 2017 and 2016 the RCF was undrawn. Proceeds of the RCF may be used from time to time for general corporate and working capital purposes of the Group. The RCF has a maturity of five years from inception of the Facility. Bonds 2023 Bond On March 16, 2016, the Company issued 1.5 percent coupon notes due March 2023, having a principal of €500 million. The bond was issued at a discount for an issue price of 98.977 percent, resulting in net proceeds of €490.7 million after the debt discount and issuance costs. The net proceeds were used, together with additional cash held by the Company, to fully repay the €500 million Bridge Loan under the Facility. The bond is unrated and was admitted to trading on the regulated market of the Irish Stock Exchange. The amount outstanding at December 31, 2017 of €498.9 million includes accrued interest of €5.9 million. 2021 Bond On November 16, 2017, the Company issued 0.25 percent coupon notes due January 2021, having a principal of €700 million. The bond was issued at a discount for an issue price of 99.557 percent, resulting in net proceeds of €694.2 million after the debt discount and issuance costs. The net proceeds were primarily used to repay the Term Loan. The bond is unrated and was admitted to trading on the regulated market of the Irish Stock Exchange. The amount outstanding at December 31, 2017 of €694.6 million includes accrued interest of €0.2 million. The notes for both the 2023 Bond and the 2021 Bond impose covenants on Ferrari including: (i) negative In 2016 and 2017 FFS Inc has pursued a strategy of self-financing, further reducing dependency on intercompany funding and increasing the portion of self-liquidating debt with various securitization transactions. On January 19, 2016, FFS Inc entered into a revolving securitization program for funding of up to $250 million by pledging retail financial receivables in the United States as collateral. In 2016, proceeds from the first sale of financial receivables were $242 million and were primarily used to repay intercompany loans. The funding limit of the program has been progressively increased over time, including to $275 million on December 16, 2016, to $325 million on July 14, 2017, and to $350 million on December 15, 2017. The notes bear interest at a rate per annum equal to the aggregate of LIBOR plus a margin of 65 basis points. As of December 31, 2017 total proceeds from the sales of financial receivables under the program were $325 million. The securitization agreement requires the maintenance of an interest rate cap. On October 20, 2016, FFS Inc entered into a revolving securitization program for funding of up to $200 million by pledging leasing financial receivables in the United States as collateral. In 2016, proceeds from the first sale of financial receivables were $175 million and were primarily used to repay U.S. Dollar denominated bank borrowings. On April 21, 2017 the funding limit of the program was increased to $225 million and this amount remained unchanged in the renewal of the program in September 2017. The notes bear interest at a rate per annum equal to the aggregate of LIBOR plus a margin of 65 basis points. As of December 31, 2017, total proceeds from the sales of financial receivables under the program were $222 million.The securitization agreement requires the maintenance of an interest rate cap. On December 28, 2016, FFS Inc entered into a revolving securitization program for funding of up to $120 million by pledging credit lines to Ferrari customers secured by personal vehicle collections and personal guarantees in the United States as collateral. In 2016, proceeds from the first sale of financial receivables were $64 million and were primarily used to repay U.S. Dollar denominated bank borrowings. On December 20, 2017, the funding limit was increased to $135 million. The notes bear interest at a rate per annum equal to the aggregate of LIBOR plus a margin of 120 basis points. As of December 31, 2017 total proceeds from the sales of financial receivables under the program were $120 million. The securitization agreement does not require an interest rate cap. Cash collected from the settlement of receivables or lines of credit pledged as collateral is subject to certain restrictions regarding its use and is principally applied to repay principal and interest of the funding. Such cash amounted to €28.2 million and €19.4 million at December 31, 2017 and 2016, respectively. 126 127 ANNUAL REPORT OPERATING RESULTS Other debt Other debt primarily relates to funding for operating activities of our U.S. subsidiaries. Free Cash Flow and Free Cash Flow from Industrial Activities Free Cash Flow and Free Cash Flow from Industrial Activities are two of our primary key performance indicators to measure the Group’s performance. These measures are presented by management to aid investors in their analysis of the Group’s financial performance and to compare the Group’s financial performance with that of other companies. Free Cash Flow is defined as cash flows from operating activities less cash flows used in investing activities. Free Cash Flow from Industrial Activities is defined as Free Cash Flow adjusted for the change in the self-liquidating financial receivables portfolio, which is the change in our receivables from financing activities. The following table sets forth our Free Cash Flow and Free Cash Flow from Industrial Activities for the years ended December 31, 2017, 2016 and 2015. For the years ended December 31, 2017 2016 (€ million) 2015 Cash flows from operating activities Cash flows used in investing activities Free Cash Flow Change in the self-liquidating financial receivables portfolio Free Cash Flow from Industrial Activities 663 (379) 284 44 328 1,005 (320) 685 (405) 280 707 (317) 390 39 429 Free Cash Flow for the year ended December 31, 2017 was €284 million compared to €685 million for the year ended December 31, 2016. For an explanation of the drivers in Free Cash Flow see “Cash Flows” above. Free Cash Flow from Industrial Activities for the year ended December 31, 2017 was €328 million compared to €280 million for the year ended December 31, 2016. The increase was primarily attributable to an increase in EBITDA and a decrease in tax payments (primarily due to the fact that in 2016 we made payments to settle the 2015 tax balance from the FCA Group tax consolidation) partially offset by an increase in capital expenditures, advances no longer being received for the LaFerrari Aperta and cash absorbed from an increase in net working capital. Free Cash Flow for the year ended December 31, 2016 was €685 million compared to €390 million for the year ended December 31, 2015. For an explanation of the drivers in Free Cash Flow see “Cash Flows” above. Free Cash Flow from Industrial Activities for the year ended December 31, 2016 was €280 million compared to €429 million for the year ended December 31, 2015. The decrease was primarily attributable to the impact in 2015 of (i) the one-time reimbursement of the financing of inventory related to the establishment of the Maserati standalone business in China of €160 million and (ii) proceeds of €37 million from Maserati S.p.A. for the disposal of assets and liabilities relating to investment properties. 128 Excluding these one-time effects in 2015, Free Cash Flow from Industrial Activities of €280 million in 2016 represented an increase of €48 million compared to €232 million of Free Cash Flow from Industrial Activities in 2015. Such increase is mainly attributable to an increase in Adjusted EBITDA from €748 million in 2015 to €880 million in 2016, as well as a positive change in net working capital in 2016 compared to 2015 and advances received for LaFerrari Aperta, which were partially offset by an increase in income taxes paid, primarily attributable to payments of 2016 tax advances and settlement of the 2015 tax balance. Non-GAAP Financial Measures We monitor and evaluate our operating and financial performance using several non-GAAP financial measures including: EBITDA, Adjusted EBITDA, Adjusted EBIT, Adjusted Net Profit, Adjusted Basic and Diluted Earnings per Common Share, Net Debt, Net Industrial Debt, Free Cash Flow and Free Cash Flow from Industrial Activities, as well as a number of financial metrics measured on a constant currency basis. We believe that these non-GAAP financial measures provide useful and relevant information regarding our performance and our ability to assess our financial performance and financial position. They also provide us with comparable measures that facilitate management’s ability to identify operational trends, as well as make decisions regarding future spending, resource allocations and other operational decisions. While similar measures are widely used in the industry in which we operate, the financial measures we use may not be comparable to other similarly titled measures used by other companies nor are they intended to be substitutes for measures of financial performance or financial position as prepared in accordance with IFRS. EBITDA and Adjusted EBITDA EBITDA is defined as net profit before income tax expense, net financial expenses and amortization and depreciation. Adjusted EBITDA is defined as EBITDA as adjusted for income and costs that are significant in nature but expected to occur infrequently. The following table sets forth the calculation of EBITDA and Adjusted EBITDA for the years ended December 31, 2017, 2016 and 2015, and provides a reconciliation of these non-GAAP measures to net profit. EBITDA is presented by management to aid investors in their analysis of the performance of the Group and to assist investors in the comparison of the Group’s performance with that of other companies. Adjusted EBITDA is presented to demonstrate how the underlying business has performed prior to the impact of the adjusted items which may obscure underlying performance and impair comparability of results between periods. For the years ended December 31, 2017 2016 (€ million) 2015 Net profit Income tax expense Net financial expenses Amortization and depreciation EBITDA Charges for Takata airbag inflator recalls Expenses incurred in relation to the IPO Employees extra bonus Gain recognized on disposal of investment property assets and liabilities Adjusted EBITDA 537 209 29 261 1,036 — — — — 1,036 400 167 28 248 843 37 — — — 880 290 144 10 275 719 — 16 19 (6) 748 129 ANNUAL REPORT OPERATING RESULTS Adjusted EBIT Adjusted EBIT represents EBIT as adjusted for income and costs that are significant in nature but expected to occur infrequently. We present such information in order to present how the underlying business has performed prior to the impact of such items, which may obscure underlying performance and impair comparability of results between the periods. The following table sets forth the calculation of Adjusted EBIT for the years ended December 31, 2017, 2016 and 2015. EBIT Charges for Takata airbag inflator recalls Expenses incurred in relation to the IPO Employees extra bonus Gain recognized on disposal of investment property assets and liabilities Adjusted EBIT Adjusted Net Profit For the years ended December 31, 2017 2016 (€ million) 2015 775 — — — — 775 595 37 — — — 632 444 — 16 19 (6) 473 Adjusted Net Profit represents net profit as adjusted for income and costs (net of tax effect), which are significant in nature, but expected to occur infrequently. The tax effect is calculated by applying the corporate tax rate in Italy, which was 24.0% for the year ended December 31, 2017 and 27.5% for the years ended December 31, 2016 and 2015, and the Italian Regional Income Tax (“IRAP”), which was 3.9% for the periods presented. We present such information in order to present how the underlying business has performed prior to the impact of such items, which may obscure underlying performance and impair comparability of results between the periods. The following table sets forth the calculation of Adjusted Net Profit for the years ended December 31, 2017, 2016 and 2015. For the years ended December 31, 2017 2016 (€ million) 2015 Net profit Charges for Takata airbag inflator recalls (net of tax effect) Expenses incurred in relation to the IPO (net of tax effect) Employees extra bonus (net of tax effect) Gain recognized on disposal of investment property assets and liabilities (net of tax effect) Adjusted Net Profit 537 — — — — 537 400 25 — — — 425 290 — 11 13 (4) 310 Adjusted Basic and Diluted Earnings per Common Share Adjusted Basic and Diluted Earnings per Common Share represents earnings per share, as adjusted for income and costs (net of tax effect), which are significant in nature, but expected to occur infrequently. The tax effect is calculated by applying the corporate tax rate in Italy, which was 24.0% for the year ended December 31, 2017 and 27.5% for the years ended December 31, 2016 and 2015, and the Italian Regional Income Tax (“IRAP”), which was 3.9% for the periods presented. We present such information in order to present how the underlying business has performed prior to the impact of such items, which may obscure underlying performance and impair comparability of results between the periods. The following table sets forth the calculation of Adjusted Basic and Diluted Earnings per Common Share for the years ended December 31, 2017, 2016 and 2015. For the years ended December 31, 2017 2016 2015 Net profit attributable to owners of the Company € million 535 Charges for Takata airbag inflator recalls (net of tax effect) Expenses incurred in relation to the IPO (net of tax effect) Employees extra bonus (net of tax effect) Gain recognized on disposal of investment property assets and liabilities (net of tax effect) Adjusted profit attributable to owners of the Company € million € million € million € million — — — — € million 535 424 399 25 — — — 288 — 11 13 (4) 308 Weighted average number of common shares thousand Adjusted basic earnings per common share € 188,951 2.83 Weighted average number of common shares for diluted earnings per common share thousand 189,759 Adjusted diluted earnings per common share (1) € 2.82 188,923 2.25 188,946 2.24 188,923 1.63 188,923 1.63 (1) For the year ended December 31, 2015 there were no potentially dilutive instruments. For the year ended December 31, 2016 the weighted average number of common shares for diluted earnings per share was increased to take into consideration the theoretical effect of the potential common shares that would be issued for the Non-Executive Directors’ compensation agreement. For the year ended December 31, 2017 the weighted average number of common shares for diluted earnings per share was increased to take into consideration the theoretical effect of (i) the potential common shares that would be issued for the Non-Executive Directors’ compensation agreement and (ii) the potential common shares that would be issued for the equity incentive program. Net Debt and Net Industrial Debt Net Industrial Debt is the primary measure used by us to analyze our financial leverage and capital structure, and is one of the key indicators, together with Net Debt, we use to measure our financial position. These measures are presented by management to aid investors in their analysis of the Group’s financial position and financial performance and to compare the Group’s financial position and financial performance with that of other companies. Net Industrial Debt is defined as total debt less cash and cash equivalents (Net Debt), 130 131 ANNUAL REPORT OPERATING RESULTS further adjusted to exclude the funded portion of the self-liquidating financial receivables portfolio, which is the portion of our receivables from financing activities that we fund with external debt or intercompany loans. Constant Currency Information The “Results of Operations” discussion below includes information about our net revenues on a constant currency basis. We use this information to assess how the underlying business has performed independent of fluctuations in foreign currency exchange rates. We calculate constant currency by applying the prior-period average foreign currency exchange rates to current period financial data expressed in local currency in which the relevant financial statements are denominated, in order to eliminate the impact of foreign currency exchange rate fluctuations (see Note 2 “Significant Accounting Policies” to the Consolidated Financial Statements, included in this Annual Report, for information on the foreign currency exchange rates applied). Although we do not believe that these measures are a substitute for GAAP measures, we do believe that such results excluding the impact of currency fluctuations year-on-year provide additional useful information to investors regarding the operating performance on a local currency basis. In particular, the U.S. Dollar experienced moderate fluctuations compared to the Euro in 2017 compared to 2016. For example, if a U.S. entity with U.S. Dollar functional currency recorded net revenues of U.S. $100 million for 2017 and 2016, we would have reported €88.5 million in net revenues for 2017 (using the 2017 average exchange rate of 1.1297), a €1.8 million decrease over the €90.3 million reported for 2016 (using the 2016 average exchange rate of 1.1069). The constant currency presentation translates the 2017 net revenues using the 2016 foreign currency exchange rates, and therefore indicates that the underlying net revenues on a constant currency basis were unchanged year-on-year. The U.S. Dollar did not experience significant fluctuations compared to the Euro in 2016 compared to 2015. For example, the effect of translating net revenues of $100 million for 2016 using the 2015 average exchange rate of 1.1094 would have been a decrease of €0.2 million. The following table sets forth a reconciliation of Net Debt and Net Industrial Debt at December 31, 2017, and 2016: Cash and cash equivalents Debt Net Debt Funded portion of the self-liquidating financial receivables portfolio Net Industrial Debt Free Cash Flow and Free Cash Flow from Industrial Activities At December 31, 2017 2016 (€ million) 648 (1,806) (1,158) 685 (473) 458 (1,848) (1,390) 737 (653) Free Cash Flow and Free Cash Flow from Industrial Activities are two of our primary key performance indicators to measure the Group’s performance. These measures are presented by management to aid investors in their analysis of the Group’s financial performance and to compare the Group’s financial performance with that of other companies. Free Cash Flow is defined as cash flows from operating activities less cash flows used in investing activities. Free Cash Flow from Industrial Activities is defined as Free Cash Flow adjusted for the change in the self-liquidating financial receivables portfolio, which is the change in our receivables from financing activities. The following table sets forth our Free Cash Flow and Free Cash Flow from Industrial Activities for the years ended December 31, 2017, 2016 and 2015. Cash flows from operating activities Cash flows used in investing activities Free Cash Flow Change in the self-liquidating financial receivables portfolio Free Cash Flow from Industrial Activities For the years ended December 31, 2017 2016 (€ million) 2015 663 (379) 284 44 328 1,005 (320) 685 (405) 280 707 (317) 390 39 429 The change in the self-liquidating financial receivables portfolio in 2016 primarily relates to the deconsolidation of FFS GmbH following the sale of a majority stake in FFS GmbH to FCA Bank on November 7, 2016. 132 133 ANNUAL REPORT SUBSEQUENT EVENTS AND 2018 OUTLOOK Subsequent events On February 9, 2018 the Company announced its intention to launch a share buyback program. The Company expects the program to involve the repurchase from time to time of up to €100 million in common shares. The program is intended to optimize the capital structure of the Company. Shares repurchased may be used to meet the Company’s obligations arising from the equity incentive plan approved in 2017. Under the program, as of February 20, 2018 the Company purchased an aggregate of 190,600 common shares on the New York Stock Exchange (NYSE) for an aggregate consideration of $22,838,301. As of February 20, 2018 the Company held 5,160,225 common shares in treasury, and in total the Company held 2.06 percent of the total issued share capital in treasury, including the common shares and the special voting shares. On February 20, 2018, the Company announced that Scuderia Ferrari has extended its partnership agreement with Philip Morris International, continuing a collaboration of nearly five decades. On February 21, 2018, the Group announced that it has selected the 88th edition of the Geneva International Motor Show for the world premiere of the Ferrari 488 Pista, the Group’s successor to Ferrari’s V8- engined special series. The Ferrari 488 Pista marks a significant step forward from the previous special series in terms of both sporty dynamics and for the level of technological carryover from racing. On February 22, 2018, the Company presented the new car for the 2018 Formula 1 World Championship. On February 23, 2018, the Board of Directors of Ferrari N.V. recommended to the Company’s shareholders that the Company declare a dividend of €0.71 per common share, totaling approximately €134 million. The proposal is subject to the approval of the Company’s shareholders at the AGM to be held on April 13, 2018. 2018 Outlook The Group indicates the following guidance for 2018: • Shipments: > 9,000 including supercars • Net revenues > Euro 3.4 billion • Adjusted EBITDA ≥ Euro 1.1 billion • Net Industrial Debt < Euro 400 million including a dividend distribution to the holders of common shares and excluding potential share repurchases. • Capital Expenditures: ~Euro 550 million February 23, 2018 Sergio Marchionne John Elkann Piero Ferrari Delphine Arnault Louis C. Camilleri Giuseppina Capaldo Eddy Cue Sergio Duca Lapo Elkann Amedeo Felisa Maria Patrizia Grieco Adam Keswick Elena Zambon 134 MAJOR SHAREHOLDERS Exor is the largest shareholder of Ferrari through its approximately 23.5 percent shareholding interest in our outstanding common shares (as of February 19, 2018). See “Overview - History of the Company.” As a result of the loyalty voting mechanism, Exor’s voting power is approximately 33.4 percent. In addition, Mr. Piero Ferrari holds approximately 10 percent of our outstanding common shares and, as a result of the loyalty voting mechanism, his voting power is approximately 15.4 percent. Exor and Mr. Piero Ferrari informed us that they have entered into a shareholder agreement, summarized below under “Shareholders’ Agreement”. Exor resulted from a cross-border merger of its predecessor entity, Exor S.p.A. with and into Exor N.V. As a result of that merger, which was completed on December 11, 2016, all activities of Exor S.p.A. are continued by Exor under universal succession, including with respect to the holding of our shares. Exor is controlled by Giovanni Agnelli B.V., (“G.A.”) which holds 52.99 percent of its share capital. G.A. is a Dutch private company with limited liability (besloten venootschap met beperkte aansprakelijkheid) with interests represented by shares, founded by Giovanni Agnelli and currently held by members of the Agnelli and Nasi families, descendants of Giovanni Agnelli, founder of Fiat. Its present principal business activity is to purchase, administer and dispose of equity interests in public and private entities and, in particular, to ensure the cohesion and continuity of the administration of its controlling equity interests. The managing directors of G.A. are John Elkann, Jeroen Preller, Florence Hinnen, Tiberto Brandolini d’Adda, Alessandro Nasi, Andrea Agnelli, Luca Ferrero de’ Gubernatis Ventimiglia and Eduardo Teodorani-Fabbri. Based on the information in Ferrari’s shareholder register, regulatory filings with the Netherlands Authority for the Financial Markets (stichting Autoriteit Financiële Markten, the “AFM”) and the SEC and other sources available to us, the following persons owned, directly or indirectly, in excess of three percent of the common shares holding voting rights of Ferrari, as of February 19, 2018: Shareholder Exor N.V.(2) Piero Ferrari (2) T. Rowe Price Associates, Inc.(3) Blackrock, Inc.(4) Other public shareholders Number of common shares Percentage owned (1) 44,435,280 18,894,295 9,410,267 6,763,273 109,450,759 23.5% 10.0% 5.0% 3.6% 57.9% (1) The percentages of share capital set out in this table are calculated as the ratio of (i) the aggregate number of outstanding common shares beneficially owned by the shareholder to (ii) the total number of outstanding common shares (net of treasury shares) of Ferrari. These percentages may slightly differ from the percentages of share capital included in the public register held by the AFM of all notifications made pursuant to the disclosure obligations under chapter 5.3 of the Dutch Act on financial supervision (Wet op het financieel toezicht; the “AFS”), such, inter alia, because any shares held in treasury by Ferrari are included in the relevant denominators for purposes of the AFS disclosure obligations. (2) Each of Exor and Piero Ferrari participate in the loyalty voting program of Ferrari and therefore, as discussed above in this section, their voting power in Ferrari is higher than the percentage of common shares beneficially held as presented in this table. (3) Based on filings with the SEC, T. Rowe Price Associates, Inc. is an investment adviser registered under Section 203 of the U.S. Investment Advisers Act of 1940 and, out of the common shares beneficially owned as set forth in the table, it has sole voting power over 3,143,852 common shares. (4) Holdings as of December 7th, 2017 based on latest filings with the AFM. Based on the information in Ferrari’s shareholder register and other sources available to us, as of February 16, 2018, approximately 39.3 million Ferrari common shares, or 20.8 percent of the outstanding Ferrari common shares, were held in the United States. As of the same date, approximately 1,200 record holders had registered addresses in the United States. 135 ANNUAL REPORT The Shareholders’ Agreement shall terminate and cease to have any effect as a result of the transfer of all the common shares owned by either Exor or Piero Ferrari to a third party. Governing law and jurisdiction The Shareholders’ Agreement is governed by and must be interpreted according to the laws of the Netherlands. Any disputes arising out of or in connection with the Shareholders’ Agreement are subject to the exclusive jurisdiction of the competent court in Amsterdam, the Netherlands, without prejudice to the right of appeal and appeal to the Supreme Court. MAJOR SHAREHOLDERS Shareholders’ Agreement On December 23, 2015, Exor and Piero Ferrari entered into a Shareholders’ Agreement, which became effective at the completion of the Separation on January 3, 2016 (the “Shareholders’ Agreement”) and prior to the admission to listing and trading of the common shares of Ferrari on the MTA. Ferrari is not a party to the Shareholders’ Agreement and does not have any rights or obligations thereunder. Below is a summary of the principal provisions of the Shareholders’ Agreement based on regulatory filings made by Exor and Piero Ferrari. Consultation For the purposes of forming and exercising, to the extent possible, a common view on the items on the agenda of any General Meeting of shareholders of Ferrari, Exor and Piero Ferrari will consult with each other prior to each General Meeting. For the purposes of this consultation right and duties, representatives of each of Exor and Piero Ferrari shall meet in order to discuss in good faith whether they have or can find a common view as to the matters on the agenda of the immediately following General Meeting. This consultation right does not include an obligation to vote in any certain way nor does it constitute a veto right in favor of Piero Ferrari. Pre-emption right in favor of Exor and right of first offer of Piero Ferrari In the event that Piero Ferrari intends to transfer (in whole or in part) his Ferrari common shares or receives a third party offer for the acquisition of all or part of his Ferrari common shares, Exor will have the right to purchase all (but not less than all) of the common shares Piero Ferrari intends to transfer on the terms of the original proposed transfer by Piero Ferrari or, in case the original proposed transfer was for no consideration, at market prices determined pursuant to the agreement. In the event Exor intends to transfer (in whole or in part) its common shares to a third party, either solicited or unsolicited, Piero Ferrari will have the right to make a binding, unconditional and irrevocable all cash offer for the purchase of such common shares. The foregoing will not apply in the case of transfers of Ferrari common shares: (i) by any party to the Shareholders’ Agreement, to a party that qualifies as a “Loyalty Transferee” (as defined in the Ferrari Articles of Association) of such party, (ii) by Exor, to any affiliate of Giovanni Agnelli B.V., to a successor in business of Giovanni Agnelli B.V. and to any affiliate of a successor in business of Giovanni Agnelli e B.V., and (iii) by any party to the Shareholders’ Agreement that is an individual, to an entity wholly owned and controlled by that same party. In addition, the provisions regarding the pre-emption right in favor of Exor and right of first offer of Piero Ferrari shall not apply in relation to, and Piero Ferrari shall be free and allowed to carry out, market sales to third parties of his Ferrari common shares which in the aggregate do not exceed, during the whole period of validity of the Shareholders Agreement, 0.5 percent of the number of common shares owned by Piero Ferrari upon completion of the Separation. Term The Shareholders’ Agreement entered into force upon completion of the Separation on January 3, 2016 and shall remain in force until the fifth anniversary of the effective date of the Separation, provided that if neither of the parties to the Shareholders’ Agreement terminates the Shareholders’ Agreement within six months before the end of the initial term, then the Shareholders’ Agreement shall be renewed automatically for another five year term. 136 137 ANNUAL REPORT CORPORATE GOVERNANCE Introduction Ferrari N.V. (the “Company”) is a public limited liability company, incorporated under the laws of the Netherlands. The Company is the holding company of the Ferrari group following the separation of the Ferrari business from Fiat Chrysler Automobiles N.V. (“FCA”), through a series of transactions (the “Separation”) described under “Overview-The Separation”. In this section, the “Company” also refers to Ferrari N.V. predecessor, formerly known as New Business Netherlands N.V., as the context may require. Such predecessor of Ferrari N.V. was the holding of the Ferrari group following completion of the restructuring intended to facilitate Ferrari’s IPO. When in this section reference is made to Ferrari N.V., it solely relates to the current Ferrari N.V. (previously known as FE New N.V.), which acquired Ferrari N.V. predecessor under universal title through a merger under Dutch law. The Company qualifies as a foreign private issuer under the New York Stock Exchange (“NYSE”) listing standards and its common shares are listed on the NYSE and on the Mercato Telematico Azionario managed by Borsa Italiana S.p.A. (“MTA”). In accordance with the NYSE Listed Company Manual, the Company is permitted to follow its home country practice with regard to certain corporate governance standards. The Company has adopted, except as discussed below, the best practice provisions of the revised Dutch corporate governance code issued by the Corporate Governance Code Monitoring Committee, which entered into force on January 1, 2018 (the “Dutch Corporate Governance Code”) and is applicable as from financial year 2017. The Dutch Corporate Governance Code contains principles and best practice provisions that regulate relations inter alia between the board of directors of a company and its committees and the relationship with the general meeting of shareholders. In this report the Company addresses its overall corporate governance structure. The Company discloses, and intends to disclose any material departure from the best practice provisions of the Dutch Corporate Governance Code in its future annual reports. Due to the revised Dutch Corporate Governance Code becoming applicable with regard to the financial year 2017, the non-executive Directors and the members of the Governance and Sustainability Committee assessed the required amendments and arranged for the various corporate governance documents of the Company to be updated in order to align with the requirements of the current Dutch Corporate Governance Code. Board of Directors Pursuant to the Company’s articles of association (the “Articles of Association”), its board of directors (the “Board of Directors”) may have three or more directors (the “Directors”). With a shareholders’ resolution adopted on April 15, 2016 the number of the Directors was set at thirteen and the current slate of Directors was appointed on April 14, 2017. The term of office of the current Board of Directors will expire on the next annual shareholders general meeting, currently scheduled on April 13, 2018, and the Company’s general meeting of shareholders is expected to elect a new Board of Directors for approximately a one-year term. Each Director may be reappointed at any subsequent annual general meeting of shareholders. The Board of Directors as a whole is responsible for the strategy of the Company. The Board of Directors is composed of one executive Director (i.e., Mr. Marchionne, Chairman and Chief Executive Officer) and twelve non- executive Directors, who do not have day-to-day responsibility within the Company or the Group. Mr. Amedeo Felisa, the Company’s Chief Executive Officer until May 2, 2016, was an executive director until April 2017 and currently serves as a non-executive director. Pursuant to Article 17 of the Articles of Association, the general authority to represent the Company shall be vested in the Board of Directors and the Chief Executive Officer. The Board of Directors appointed the following internal committees: (i) an Audit Committee, (ii) a Governance and Sustainability Committee, and (iii) a Compensation Committee. Nine directors currently qualify as independent (representing a majority) for purposes of NYSE rules, Rule 10A-3 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and eight Directors qualify as independent (representing a majority) for purposes of the Dutch Corporate Governance Code. The non-executive directors of the Company met to discuss the functioning of the Board and its committees, the functioning of the executive directors as a corporate body of the company, or the corporate strategy and the main risks of the business, pursuant to best practice provisions 2.2.6, 2.2.7 and 1.1.2 of the Dutch Corporate Governance Code. The Board of Directors has resolved to grant the following titles: • • • • Sergio Marchionne: Chairman and Chief Executive Officer; John Elkann: Vice-Chairman; Piero Ferrari: Vice-Chairman; and Louis C. Camilleri: Senior Non-Executive Director. The Board of Directors has also resolved to appoint Louis C. Camilleri as chairman of the Board, as referred to in the Dutch Civil Code, who will in such capacity have the title Chair (Voorzitter). The following members are independent within the meaning of the Dutch Corporate Governance Code: • • • • • • • • Louis C. Camilleri Delphine Arnault; Giuseppina Capaldo; Eddy Cue; Sergio Duca; Maria Patrizia Grieco; Adam Keswick; and Elena Zambon. 138 139 ANNUAL REPORT CORPORATE GOVERANCE Directors are expected to prepare themselves for and to attend all Board of Directors meetings, the annual general meeting of shareholders and the meetings of the committees on which they serve, with the understanding that, on occasion, a Director may be unable to attend a meeting. From January 1, 2017 to the year-end there were three meetings of the Board of Directors. The attendance rate at these meetings was 94.87 percent. The current composition of the Board of Directors is the following: Sergio Marchionne (Chairman and executive director) - Mr. Marchionne is the Chairman and Chief Executive Officer of Ferrari N.V.. Mr. Marchionne is also the Chairman of Ferrari S.p.A. since October 2014 and the Chief Executive Officer since June 2016. Mr. Marchionne currently serves as Chief Executive Officer of FCA, and Chairman and Chief Executive Officer of FCA U.S.. Mr. Marchionne leads FCA’s Group Executive Council and has been Chief Operating Officer of its NAFTA region since September 2011. He also serves as Chairman of CNH Industrial N.V. (“CNHI”). He was the chairman of Fiat Industrial and CNH Global N.V. until the integration of these companies into CNHI in 2013. Prior to joining FCA, Mr. Marchionne served as Chief Executive Officer of SGS SA, Chief Executive Officer of the Lonza Group Ltd. and Chief Executive Officer of Alusuisse Lonza (Algroup). He also served as Vice President of Legal and Corporate Development and Chief Financial Officer of the Lawson Group after serving as Vice President of Finance and Chief Financial Officer of Acklands Ltd. and Executive Vice President of Glenex Industries. Mr. Marchionne holds a Bachelor of Laws from Osgoode Hall Law School at York University in Toronto, Canada and a Master of Business Administration from the University of Windsor, Canada. Mr. Marchionne also holds a Bachelor of Arts with a major in Philosophy and minor in Economics from the University of Toronto. Mr. Marchionne serves on the Board of Directors of Philip Morris International Inc. and as Executive Chairman of SGS SA headquartered in Geneva. Additionally, Mr. Marchionne is non-executive Vice Chairman of Exor N.V.. Mr. Marchionne is a member of the Board of Directors of ACEA (European Automobile Manufacturers Association). He previously served as appointed non- executive Vice Chairman and Senior Independent Director of UBS AG. Born in 1952, Canadian and Italian citizenship. John Elkann (Vice Chairman and non-executive director) - Mr. John Elkann is Vice Chairman of Ferrari N.V., Chairman and Chief Executive Officer of EXOR and Chairman of Fiat Chrysler Automobiles N.V.. Born in New York in 1976, Mr. Elkann obtained a scientific baccalaureate from the Lycée Victor Duruy in Paris and grad- uated in Engineering from Politecnico, the Engineering University of Turin. While at university, he gained work experience in various companies of the Fiat Group in the UK and Poland (manufacturing) as well as in France (sales and marketing). He started his professional career in 2001 at General Electric as a member of the Cor- porate Audit Staff, with assignments in Asia, the USA and Europe. John Elkann is Chairman of Giovanni Agnelli B.V. and of PartnerRe. He is Vice Chairman of Ferrari S.p.A. and a board member of The Economist Group and of GEDI Gruppo Editoriale S.p.A.. Mr. Elkann is a trustee of MoMA. He also serves as Vice Chairman of the Ital- ian Aspen Institute and of the Giovanni Agnelli Foundation. Mr. John Elkann is the brother of Mr. Lapo Elkann (non-executive director). Born in 1976, Italian citizenship. Piero Ferrari (Vice Chairman and non-executive director) - Mr. Piero Ferrari is Vice Chairman of Ferrari N.V. and he has been Vice Chairman of Ferrari S.p.A. since 1988. He also serves as Chairman of HPE- COXA, is a board member of Ferretti Group and a board member and Vice President of CRN Ancona (Ferretti Group). He was President of Piaggio Aero Industries S.p.A. from 1998 to 2014 and served as Chairman of the Italian Motor Sport Commission (CSAI) from 1998 to 2001 and BA SERVICE from 2000 to 2015. He was also a board member and Vice President of Banca Popolare dell’Emilia Romagna in Modena from 2002 to 2011 and from 2001 to 2014 respectively. The son of Ferrari’s founder Enzo Ferrari, Mr. Piero Ferrari covered a variety of management positions in the motor sport division of Ferrari from 1970 to 1988 with increasing responsibilities. His first position with Ferrari dates back to 1965 working on the production of the Dino 206 Competizione racing car. Mr. Piero Ferrari received an honorary degree in Aerospace Engineering from the University of Naples Federico II in 2004 and an Honorary Degree in Mechanical Engineering from the University of Modena and Reggio Emilia in 2005. In 2004, Mr. Piero Ferrari was awarded the title of Cavaliere del Lavoro. Born in 1945, Italian citizenship. Delphine Arnault (non-executive director) - Born on April 4th 1975, Ms. Delphine Arnault graduated from the EDHEC Business School and the London School of Economics. She began her career at McKinsey & Company, the global management consultancy firm, where she was a Consultant for two years. In 2001, she joined the Executive Committee of Christian Dior Couture where she directed several product lines. She was appointed Deputy General Manager of Christian Dior Couture in 2008 and in September 2013 Deputy General Manager of Louis Vuitton Malletier. She has been a main board director of LVMH Moët Hennessy Louis Vuitton SA since 2003. Delphine was appointed to the board of Château Cheval Blanc, the Saint-Emilion premier grand cru classé, and, until 2017, sat on the supervisory board of Les Echos, the leading French business daily. In 2002 she joined the board of Loewe, the celebrated Spanish leather goods company, and was appointed to Pucci’s Board of Directors in 2007. She was appointed to the boards of Céline in December 2011, Christian Dior SE in April 2012 and 21st Century Fox in June 2013. In December 2015 she joined the board of the Italian jeweler Repossi, in which LVMH is a shareholder. Delphine Arnault has also been a member of the supervisory board of M6 Group since November 2009 and of Havas since May 2013. Born in 1975, French citizenship. Louis C. Camilleri (non-executive director) - Mr. Camilleri is Senior Non-Executive Director and Chairman of the Board of Directors of Ferrari N.V.. Mr. Camilleri currently serves as Non-Executive Chairman of the Board of Philip Morris International Inc. (“PMI”). From March 2008 to May 2013, he served as Chairman and Chief Executive Officer of PMI. From April 2002 and August 2002 until March 2008, he was Chief Executive Officer and Chairman of Altria Group, Inc., respectively. From November 1996 to April 2002, he served as Senior Vice President and Chief Financial Officer of Altria Group, Inc. He had been employed continuously by Altria Group, Inc. and its subsidiaries (including PMI) in various capacities since 1978. Mr. Camilleri was appointed to the Board of Directors of América Móvil, S.A.B. de C.V. in April 2011, and previously served on the Board of Telmex International SAB from December 2009. Mr. Camilleri was a director of Kraft Foods Inc. (“Kraft”) from March 2001 to December 2007 and was Kraft’s Chairman from September 2002 to March 2007. Mr. Camilleri received a degree in Economics and Business Administration from HEC Lausanne, the Faculty of Business & Economics of the University of Lausanne (Switzerland). Born in 1955, British citizenship. Giuseppina Capaldo (non-executive director) - Ms. Capaldo is Full Professor of Private Law, at “La Sapienza” University of Rome. She is an independent member of the Board of Directors of Salini Impregilo S.p.A. (2012-present) and Banca Monte dei Paschi S.p.A. (2017-present). She was an independent member of the Board of Directors of Exor S.p.A. from 2012 to 2015 and Credito Fondiario S.p.A. (2014-2017). She was 140 141 ANNUAL REPORT CORPORATE GOVERANCE a member of the Board of Directors of Ariscom S.p.A. (an Italian insurance company) from 2012-2015 and A.D.I.R. - Assicurazioni di Roma (2006-2010). She collaborated with the Macchi di Cellere Gangemi law firm in the Banking and Finance, Corporate and M&A sectors (2004-2007). She has been Deputy Rector for Resource Planning and Assets (since 2014) at La Sapienza University; Director of LLM “Financial Markets Law” (since 2009). Previously, she served as Deputy Rector for Strategic Planning (2008-2014); Head of Department of “Law and Business” (2007-2013); and Director of PhD “Contract Law and Business” (2007-2011). Ms. Capaldo has a degree in Economics and a degree in Law from “La Sapienza” University of Rome, has been a licensed certified public accountant since 1992 and is listed in the Register of Independent Auditors (since 1999). In addition, Ms. Capaldo has been qualified to practice law in Italy since 2003. She authored several publications in the areas of contract law, insurance law, financial law and market legal theory. and gaining experience as assistant to Henry Kissinger, Lapo emerged as Worldwide Brand Promotion Director for Fiat Group where he successfully carried out several projects in below-the-line marketing and participated in the relaunch of the Fiat 500. In 2007 he undertook the entrepreneurial path founding the lifestyle brand “Italia Independent”, the creative factory “Independent Ideas” and the Holding “Italia Independent Group”, which was listed on the Italian Stock Exchange in June 2013. In 2011 he started a collaboration with Ferrari to create the Tailor Made Unit. In March 2015 he founded Garage Italia Customs, a customization service for the motion industry. In July 2013 he was inducted in the Automotive Hall of Fame, the American institution dedicated to preserving and celebrating outstanding automotive achievement. Lapo Elkann also serves on the Board of Directors of Pinacoteca Giovanni e Marella Agnelli. Mr. Lapo Elkann is the brother of Mr. John Elkann (Vice Chairman and non-executive director). Born in 1969, Italian citizenship. Born in 1977, Italian citizenship. Eddy Cue (non-executive director) - Mr. Cue currently serves as Apple Inc.’s Senior Vice President of Internet Software and Services. He joined Apple in 1989 and oversees Apple’s industry-leading content stores including the iTunes Store, the App Store and the iBooks Store, as well as Apple Pay, Siri, Maps, iAd, the iCloud services, and Apple’s productivity and creativity apps. Mr. Cue earned a bachelor’s degree in Computer Science and Economics from Duke University. He was recognized by renowned cancer research center City of Hope with their 2014 Spirit of Life Award, honoring an individual whose work has fundamentally impacted the music, film and entertainment industry. Born in 1964, American citizenship. Sergio Duca (non-executive director) - Mr. Duca is the Chairman of the Board of Statutory Auditors of Enel S.p.A. since April 2010 and a member of the Statutory Auditors of BasicNet S.p.A. since 2017. He also serves as Chairman of the Board of Auditors of the Fondazione per la Scuola of Compagnia di San Paolo and ISPI (Institute for the Study of International Politics), as well as a member of the board of auditors of the Intesa San Paolo Foundation Onlus. Mr. Duca has previously served as Chairman of the Board of Directors of Orizzonte SGR S.p.A. from 2008 until 2016, Chairman of the Board of Statutory Auditors of Exor S.p.A. until May 2015, Chairman of the Board of Statutory Auditors and effective auditor of GTech until April 2015, a member of the Board of ASTM S.p.A. and Chairman of the Audit Committee of ASTM S.p.A. from 2010 until 2013, Chairman of the Board of Statutory Auditors of Tosetti Value SIM and an independent director of Sella Gestione SGR until April 2010. From 1997 until July 2007, Mr. Duca was the Chairman of PricewaterhouseCoopers S.p.A.. In addition, he has previously served as Chairman of the Board of Auditors of the Silvio Tronchetti Provera Foundation, Chairman of the board of auditors of Compagnia di San Paolo until May 2016, member of the Edison Foundation’s advisory board and the University Bocconi in Milan’s development committee, as well as Chairman of the Bocconi’s Alumni Association’s Board of Auditors and a member of the Board of Auditors of the ANDAF (Italian Association of Chief Financial Officers). As a certified chartered accountant and auditor, he acquired broad experience through the PricewaterhouseCoopers network as the external auditor of a number of significant Italian listed companies. Mr. Duca graduated with honors in Economics and Business from University Bocconi in Milan. Born in 1947, Italian citizenship. Lapo Elkann (non-executive director) - Mr. Lapo Edovard Elkann is Chairman and Founder of Italia Independent Group and of Garage Italia Customs. Born in New York in 1977, after studying in France and England Amedeo Felisa (non-executive director) - Mr. Felisa, who joined Ferrari in 1990, was the CEO of Ferrari S.p.A. from 2008 until June 2016. From 2006 to 2008 he served as General Manager and Deputy General Manager. From 1996 to 2004 he was the General Manager of the GT department, coordinating the product development, powertrains and vehicle departments of both Ferrari and Maserati with respect to the market positioning of the two brands. In the 1990s, as a Technical Senior Vice President, Mr. Felisa oversaw the planning, coordination and management of the entire technical department, including defining new business model plans, supervising the development of both innovation and products and managing the product development teams, including ensuring employee growth. Prior to joining Ferrari, he was a product development team leader at Alfa Romeo S.p.A.. Mr. Felisa holds a degree in mechanic engineering from the Milan Politecnico. Born in 1946, Italian citizenship. Maria Patrizia Grieco (non-executive director) - Mrs. Maria Patrizia Grieco has been the Chairman of the Board of Directors of Enel since May 2014. After graduating in law at the University of Milan, she started her career in 1977 at Italtel, where in 1994 she became Chief of the Legal and General Affairs directorate. In 1999, she was appointed General Manager to re-organize and reposition the company, and in 2002 she became Chief Executive Officer. Subsequently, she held the positions of Chief Executive Officer of Siemens Informatica, Partner of Value Partners and Chief Executive Officer of the Group Value Team (today NTT Data). From 2008 to 2013, she was Chief Executive Officer of Olivetti, where she also held the role of Chairman from 2011. She has been a director of Fiat Industrial and she is currently on the boards of Anima Holding, Ferrari, Amplifon, CIR and Bocconi University. Mrs. Grieco is also a member of the steering committee of Assonime. Maria Patrizia Grieco was appointed Chairman of the Italian Corporate Governance Committee in 2017. The purpose of the Committee is the promotion of good corporate governance practices of Italian listed companies. Born in 1952, Italian citizenship. Adam Keswick (non-executive director) - Mr. Adam Keswick was appointed Non-Executive Director of Jardine Matheson in 2016. He first joined the Jardine Matheson Group in 2001 before being appointed to the Board of Jardine Matheson in 2007. He was Deputy Managing Director of Jardine Matheson from 2012 to 2016 and became Chairman of Matheson & Co. in August 2016. Mr. Keswick is also Deputy Chairman of Jardine Lloyd Thompson and a director of Dairy Farm, Hongkong Land, Jardine Strategic and Mandarin Oriental. He is also a supervisory board member of Rothschild & Co.. Born in 1973, British citizenship. 142 143 ANNUAL REPORT CORPORATE GOVERANCE Elena Zambon (non-executive director) - Ms. Zambon is President of Zambon S.p.A., a multinational pharmaceutical company founded in Vicenza in 1906, Vice President of ZaCh - Zambon Chemicals and member of the Board of Zambon Company S.p.A., holding company of the group. Ms. Zambon is the founder of Secofind, the multi-family office of the Zambon family, and President of the Foundation Zoé - Zambon Open Education. Ms. Zambon is a member of the Board of Unicredit and a member of the Board of IIT - Istituto Italiano di Tecnologia (Italian Institute of Technology). Furthermore, Ms. Zambon is President of AIdAF, the Italian Association of Family Businesses, a board member of FBN, Family Business Network, and Vice President of Aspen Institute Italia. In June 2017, Elena Zambon was appointed Vice President of Assolombarda for Research, Open Innovation, Life Sciences, EMA and Technopole. In June 2014 she was nominated “Cavaliere del Lavoro” by the President of the Italian Republic and has received the award “Imprenditore Olivettiano 2010” and “Marisa Belisario 2010”, annually assigned to women who have distinguished themselves in the business world. From 1989 to 1994, Ms. Zambon worked for Citibank. Ms. Zambon was born in Vicenza in 1964, and received a bachelor degree in Business Administration at the University “Bocconi” in Milan. Born in 1964, Italian citizenship. Composition of the Board of Directors Pursuant to Dutch law, as from the financial year 2017 Ferrari should strive to achieve that its Board of Directors contain at least 30% male and at least 30% female board members, and it should disclose in its annual report if this requirement is not met. Four of our current thirteen Directors are female, and therefore the Board of Directors complies with the above mentioned standard. The Company envisages to continue achieving sufficient diversity of views and the expertise needed for a good understanding of current affairs and longer-term risks and opportunities relating to the Company’s business and therefore the Board of Directors adopted a Diversity Policy effective as of 31 December 2017, which stipulates that one of the targets is that “at least 30% of the seats of the Board of Directors are occupied by women and at least 30% by men”. Board Regulations The current regulations of the Board of Directors address matters that concern the Board of Directors, its committees and its relationship with the general meeting of shareholders and employee participation bodies. The regulations contain provisions concerning the manner in which meetings of the Board of Directors are called and held, including the decision-making process. The regulations provide that meetings may be held by telephone conference or video-conference, provided that all participating Directors can follow the proceedings and participate in real time discussion of the items on the agenda. The Board of Directors can only adopt valid resolutions when the majority of the Directors in office shall be present at the meeting or be represented thereat. The Board of Directors shall be authorized to adopt resolutions without convening a meeting if all Directors shall have expressed their opinions in writing, unless one or more Directors shall object in writing to the resolution being adopted in this way prior to the adoption of the resolution. The Audit Committee The Audit Committee is responsible, inter alia, for assisting and advising the Board of Directors’ oversight of: (i) the integrity of the Company’s financial statements, (ii) the Company’s policy on tax planning, (iii) the Company’s financing, (iv) the Company’s applications of information and communication technology, (v) the systems of internal controls that management and the Board of Directors have established, (vi) the Company’s compliance with legal and regulatory requirements, (vii) the Company’s compliance with recommendations and observations of internal and independent auditors, (viii) the Company’s policies and procedures for addressing certain actual or perceived conflicts of interest, (ix) the review and approval of related party transactions, (x) the independent auditors’ qualifications, independence, remuneration and any non-audit services for the Company, (xi) the performance of the Company’s internal auditors and of the independent auditors, (xii) risk management guidelines and policies, and (xiii) the implementation and effectiveness of the Company’s ethics and compliance program. The Audit Committee currently consists of Mr. Duca (Chairperson), Ms. Capaldo and Ms. Grieco, each of whom is independent within the meaning of the Dutch Corporate Governance Code. The Audit Committee is elected by the Board of Directors and is comprised of at least three non-executive Directors. Audit Committee members are also required (i) not to have any material relationship with the Company or to serve as auditors or accountants for the Company, (ii) to be “independent”, for purposes of NYSE rules, Rule 10A-3 of the Exchange Act and the Dutch Corporate Governance Code, and (iii) to be “financially literate” and have “accounting or selected financial management expertise” (as determined by the Board of Directors). At least one member of the Audit Committee shall be a “financial expert” as defined by the Sarbanes-Oxley Act and the rules of the U.S. Securities and Exchange Commission and section 2(3) of the Dutch Decree on the Establishment of an audit committee. No Audit Committee member may serve on more than four audit committees for other public companies, absent a waiver from the Board of Directors. Unless decided otherwise by the Audit Committee, the independent auditors of the Company are required to attend the Audit Committee meetings, while the Chief Executive Officer and Chief Financial Officer are free, but not required, to attend the meetings. In 2017 the Audit Committee met nine times and the average attendance rate was 100 percent. At these meetings several matters were discussed, including the audit committee role and responsibilities, the Company’s financial control and risk framework, risk assessment, internal control over financial reporting pursuant to the applicable rules, and a financial overview of operating results. A Director may only be represented by another Director authorized in writing. A Director may not act as a proxy for more than one other Director. The Compensation Committee All resolutions shall be adopted by the favorable vote of the majority of the Directors present or represented at the meeting, provided that the regulations may contain specific provisions in this respect. Each Director shall have one vote. The Compensation Committee is responsible for, among other things, assisting and advising the Board of Directors in: (i) determining executive compensation consistent with the Company’s remuneration policy, (ii) reviewing and approving the remuneration structure for the executive Directors, (iii) administering equity 144 145 ANNUAL REPORT CORPORATE GOVERANCE incentive plans and deferred compensation benefit plans, (iv) discussing with management the Company’s policies and practices related to compensation and issuing recommendations thereon, and (v) to prepare the remuneration report. The Compensation Committee currently consists of Mr. Camilleri (Chairperson), Mr. John Elkann and Ms. Zambon. The Compensation Committee is elected by the Board of Directors and is comprised of at least three non-executive Directors. Unless decided otherwise by the Compensation Committee, the Head of Human Resources of the Company attends its meetings. In 2017 the Compensation Committee met once. The Compensation Committee reviewed the remuneration report and the implementation of the Remuneration Policy and proposed amendments to the Remuneration Policy, which were adopted by the general meeting of the shareholders held on April 14, 2017. Further information on the activities of the Compensation Committee are included in the remuneration report. officers, former directors, former officers and any person who may have served at its request as a director or officer of another company in which it owns shares or of which it is a creditor, who were or are made a party or are threatened to be made a party to or are involved in, any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, arbitrative or investigative (each a “Proceeding”), or any appeal in such a Proceeding or any inquiry or investigation that could lead to such a Proceeding, against any and all liabilities, damages, reasonable and documented expenses (including reasonably incurred and substantiated attorneys’ fees), financial effects of judgments, fines, penalties (including excise and similar taxes and punitive damages) and amounts paid in settlement in connection with such Proceeding by any of them. Such indemnification shall not be deemed exclusive of any other rights to which those indemnified may be entitled otherwise. Notwithstanding the above, no indemnification shall be made in respect of any claim, issue or matter as to which any of the above-mentioned indemnified persons shall be adjudged to be liable for gross negligence or willful misconduct in the performance of such person’s duty to Ferrari. Ferrari has purchased directors’ and officers’ liability insurance for the members of the Board of Directors and certain other officers, substantially in line with that purchased by similarly situated companies. The Governance and Sustainability Committee Conflict of Interest The Governance and Sustainability Committee is responsible for, among other things, assisting and advising the Board of Directors with: (i) the identification of the criteria, professional and personal qualifications for candidates to serve as Directors, (ii) periodical assessment of the size and composition of the Board of Directors, (iii) periodical assessment of the functioning of individual Directors and reporting on this to the Board of Directors, (iv) proposals for appointment of executive and non-executive Directors, (v) supervision of the selection criteria and appointment procedure for senior management, (vi) monitoring and evaluating reports on the Group’s sustainable development policies and practices, management standards, strategy, performance and governance globally, and (vii) reviewing, assessing and making recommendations as to strategic guidelines for sustainability-related issues, and reviewing the annual Sustainability Report. The Governance and Sustainability Committee currently consists of Mr. John Elkann (Chairperson), Mr. Cue, Mr. Duca and Mr. Ferrari. The Governance and Sustainability Committee is elected by the Board of Directors and is comprised of at least three Directors. No more than two members may be non-independent, and at most one of the members may be an executive Director. In 2017 the Governance and Sustainability Committee met once. The Committee reviewed the Board’s and Committee’s assessments, the Sustainability achievement and objectives, and the recommendations for Directors’ election. In addition, as described above, the charters of the Audit Committee, Compensation Committee and Governance and Sustainability Committee set forth independence requirements for their members for purposes of the Dutch Corporate Governance Code. Audit Committee members are also required to qualify as independent for purposes of NYSE rules and Rule 10A-3 of the Exchange Act. Indemnification of Directors Under Dutch law, indemnification provisions may be included in a company’s articles of association. Under the Company’s Articles of Association, the Company is required to indemnify any and all of its directors, A Director shall not participate in discussions and decision making of the Board of Directors with respect to a matter in relation to which he or she has a direct or indirect personal interest that is in conflict with the interests of the Company and the business associated with the Company (“Conflict of Interest”). In addition, the Board of Directors as a whole may, on an ad hoc basis, resolve that there is such a strong appearance of a Conflict of Interest of an individual Director in relation to a specific matter, that it is deemed in the best interest of a proper decision making process that such individual Director be excused from participation in the decision making process with respect to such matter even though such Director may not have an actual Conflict of Interest. At least annually, each Director shall assess in good faith whether (i) he or she is independent under (A) best practice provision 2.1.8 of the Dutch Corporate Governance Code, (B) the requirements of Rule 10A- 3 under the Exchange Act, and (C) Section 303A of the NYSE Listed Company Manual; and (ii) he or she would have a Conflict of Interest in connection with any transactions between the Company and a significant shareholder or related party of the Company, including affiliates of a significant shareholder (such conflict, a “Related-Party Conflict”), it being understood that currently Exor N.V. (“Exor”) would be considered a significant shareholder. The Directors shall inform the Board of Directors through the Senior Non-executive Director or the Secretary of the Board of Directors as to all material information regarding any circumstances or relationships that may impact their characterization as “independent,” or impact the assessment of their interests, including by responding promptly to the annual D&O questionnaires circulated by or on behalf of the Secretary that are designed to elicit relevant information regarding business and other relationships. Based on each Director’s assessment described above, the Board of Directors shall make a determination at least annually regarding such Director’s independence and such Director’s Related-Party Conflict. These annual determinations shall be conclusive, absent a change in circumstances from those disclosed to the Board of Directors, that necessitates a change in such determination. 146 147 ANNUAL REPORT CORPORATE GOVERANCE Mr. Marchionne is Chief Executive Officer of FCA and a director of Exor, our and FCA’s largest shareholder. FCA, Exor and a number of companies in the FCA and Exor groups are related parties to Ferrari, see “Risk Factors - We may have potential conflicts of interest with FCA and Exor and its related companies” and Note 29 “Related Party Transactions” to our Consolidated Financial Statements. Finally, Mr. Ferrari controls COXA S.p.A, from which Ferrari purchases components for Formula 1 racing cars, and HPE S.r.l., which provides consultancy services to Ferrari, see Note 29 to our Consolidated Financial Statements. Loyalty Voting Structure In connection with the Separation, Ferrari issued special voting shares with a nominal value of one Euro cent (€0.01) per share, to FCA, Piero Ferrari and FCA shareholders holding FCA special voting shares prior to the Separation including Exor, in addition to Ferrari common shares. After the Separation Exor holds approximately 23.5 percent of our outstanding common shares and approximately 33.4 percent of the voting power in us, Piero Ferrari holds approximately 10 percent of our outstanding common shares and approximately 15.4 percent of the voting power in us and public shareholders hold approximately 51.2 percent of the voting power in us. For more information on the Separation, see “Overview - The Separation”. Subject to meeting certain conditions, our common shares can be registered in our loyalty register (the “Loyalty Register”) and all such common shares may qualify as qualifying common shares (“Qualifying Common Shares”). The holder of Qualifying Common Shares is entitled to receive without consideration one special voting share in respect of each such Qualifying Common Share. Pursuant to the Terms and Conditions, and for so long as the Ferrari common shares remain in the Loyalty Register, such Ferrari common shares shall not be sold, disposed of, transferred, except in very limited circumstances (i.e., transfers to affiliates or to relatives through succession, donation or other transfers (defined in the Terms and Conditions as “Loyalty Transferee”), but a shareholder may create or permit to exist any pledge, lien, fixed or floating charge or other encumbrance over such Ferrari common shares, provided that the voting rights in respect of such Ferrari common shares and any corresponding special voting shares remain with such shareholder at all times. Ferrari’s shareholders who want to directly or indirectly sell, dispose of, trade or transfer such Ferrari common shares or otherwise grant any right or interest therein, or create or permit to exist any pledge, lien, fixed or floating charge or other encumbrance over such Ferrari common shares with a potential transfer of voting rights relating to such encumbrances will need to submit a de-registration request as referred to in the Terms and Conditions, in order to transfer the relevant Ferrari common shares to the regular trading system (the “Regular Trading System”) except that a Ferrari shareholder may transfer Ferrari common shares included in the Loyalty Register to a Loyalty Transferee (as defined in the Terms and Conditions) of such Ferrari shareholder without transferring such shares from the Loyalty Register to the Regular Trading System. Ferrari’s shareholders who seek to qualify to receive special voting shares can also request to have their Ferrari common shares registered in the Loyalty Register. Upon registration in the Loyalty Register such shares will be eligible to be treated as Qualifying Common Shares, provided they meet the conditions. Notwithstanding the fact that Article 13 of the Ferrari Articles of Association permits the Board of Directors of Ferrari to approve transfers of special voting shares, the special voting shares cannot be traded and are transferable only in very limited circumstances (i.e., to a Loyalty Transferee described above, or to Ferrari for no consideration (om niet)). Pursuant to Article 23 of the Ferrari Articles of Association, Ferrari shall maintain a special capital reserve to be credited against the share premium exclusively for the purpose of facilitating any issuance or cancellation of special voting shares. The special voting shares shall be issued and paid up against this special capital reserve. The special voting shares have immaterial economic entitlements. Such economic entitlements are designed to comply with Dutch law but are immaterial for investors. The special voting shares carry the same voting rights as Ferrari common shares. Section 10 of the Terms and Conditions include liquidated damages provisions intended to deter any attempt by holders to circumvent the terms of the special voting shares. Such liquidated damages provisions may be enforced by Ferrari by means of a legal action brought by Ferrari before competent courts of Amsterdam, the Netherlands. In particular, a violation of the provisions of the Terms and Conditions concerning the transfer of special voting shares, Electing Common Shares (common shares registered in the Loyalty Register for the purpose of becoming Qualifying Common Shares in accordance with the Ferrari Articles of Association) and Qualifying Common Shares may lead to the imposition of liquidated damages. Because we expect the restrictions on transfers of the special voting shares to be effective in practice we do not expect the liquidated damages provisions to be used. Pursuant to Section 12 of the Terms and Conditions, any amendment to the Terms and Conditions (other than merely technical, non-material amendments and unless such amendment is required to ensure compliance with applicable law or regulations or the listing rules of any securities exchange on which the Ferrari common shares are listed) may only be made with the approval of the general meeting of shareholders of Ferrari. At any time, a holder of Qualifying Common Shares or Electing Common Shares may request the de-registration of such shares from the Loyalty Register to enable free trading thereof in the Regular Trading System. Upon the de-registration from the Loyalty Register, such shares will cease to be Electing Common Shares or Qualifying Common Shares as the case may be and will be freely tradable and voting rights attached to the corresponding special voting shares will be suspended with immediate effect and such special voting shares shall be transferred to Ferrari for no consideration (om niet). A shareholder who is a holder of Qualifying Common Shares or Electing Common Shares must promptly notify the Agent and Ferrari upon the occurrence of a “change of control” as defined in the Ferrari Articles of Association, as described below. The change of control will trigger the de-registration of the relevant Electing Common Shares or Qualifying Common Shares or the relevant Ferrari common shares in the Loyalty Register. The voting rights attached to the special voting shares issued and allocated in respect of the relevant Qualified Common Shares will be suspended upon a direct or indirect change of control in respect of the relevant holder of such Qualifying Common Shares that are registered in the Loyalty Register. For the purposes of this section a “change of control” shall mean, in respect of any Ferrari shareholder that is not an individual (natuurlijk persoon), any direct or indirect transfer in one or a series of related transactions as a result of which (i) a majority of the voting rights of such shareholder, (ii) the de facto ability to direct the casting of a majority of the votes exercisable at general meetings of shareholders of such shareholder and/or 148 149 ANNUAL REPORT CORPORATE GOVERANCE (iii) the ability to appoint or remove a majority of the directors, executive directors or board members or executive officers of such shareholder or to direct the casting of a majority or more of the voting rights at meetings of the board of directors, governing body or executive committee of such shareholder has been transferred to a new owner, provided that no change of control shall be deemed to have occurred if (a) the transfer of ownership and/or control is an intra-group transfer under the same parent company, (b) the transfer of ownership and /or control is the result of the succession or the liquidation of assets between spouses or the inheritance, inter vivos donation or other transfer to a spouse or a relative up to and including the fourth degree or (c) the fair market value of the Qualifying Common Shares held by such shareholder represents less than twenty percent (20 percent) of the total assets of the Transferred Group at the time of the transfer and the Qualifying Common Shares held by such shareholder, in the sole judgment of the Company, are not otherwise material to the Transferred Group or the change of control transaction. “Transferred Group” shall mean the relevant shareholder together with its affiliates, if any, over which control was transferred as part of the same change of control transaction within the meaning of the definition of change of control. If Ferrari is dissolved and liquidated, whatever remains of Ferrari’s equity after all its debts have been discharged shall first be applied to distribute the aggregate balance of share premium reserves and other reserves (other than the special dividend reserve), to holders of Ferrari common shares in proportion to the aggregate nominal value of the Ferrari common shares held by each holder; secondly, from any balance remaining, an amount equal to the aggregate amount of the nominal value of the Ferrari common shares will be distributed to the holders of Ferrari common shares in proportion to the aggregate nominal value of Ferrari common shares held by each of them; thirdly, from any balance remaining, an amount equal to the aggregate amount of the special voting shares dividend reserve will be distributed to the holders of special voting shares in proportion to the aggregate nominal value of the special voting shares held by each of them; fourthly, from any balance remaining, the aggregate amount of the nominal value of the special voting shares will be distributed to the holders of special voting shares in proportion to the aggregate nominal value of the special voting shares held by each of them; and, lastly, any balance remaining will be distributed to the holders of Ferrari common shares in proportion to the aggregate nominal value of Ferrari common shares held by each of them. Disclosures pursuant to Decree Article 10 EU-Directive on Takeovers In accordance with the Dutch Besluit artikel 10 overnamerichtlijn (the Decree), the Company makes the following disclosures: a. For information on the capital structure of the Company, the composition of the issued share capital and the existence of the two classes of shares, please refer to Note 14 to the Company financial statements in this Annual Report. For information on the rights attached to the common shares, please refer to the Articles of Association which can be found on the Company’s website. To summarize, the rights attached to common shares comprise pre- emptive rights upon issue of common shares, the entitlement to attend the general meeting of Shareholders and to speak and vote at that meeting and the entitlement to distributions of such amount of the Company’s profit as remains after allocation to reserves. For information on the rights attached to the special voting shares, please refer to the Articles of Association and the Terms and Conditions for the Special Voting Shares which can both be found on the Company’s website and more in particular to the paragraph “Loyalty Voting Structure” of this Annual Report in the chapter “Corporate Governance”. As at 31 December 2017, the issued share capital of the Company consisted of 193,923,499 common shares, representing approximately 77.4 percent of the aggregate issued share capital, and 56,497,618 special voting shares, representing approximately 22.6 percent of the aggregate issued share capital. b. The Company has imposed no limitations on the transfer of common shares. The Articles of Association provide in Article 13 for transfer restrictions for special voting shares. c. For information on participations in the Company’s capital in respect of which pursuant to Sections 5:34, 5:35 and 5:43 of the Dutch Financial Supervision Acts (Wet op het financieel toezicht) notification requirements apply, please refer to the chapter “Major Shareholders” of this Annual Report. There you will find a list of Shareholders who are known to the Company to have holdings of 3% or more at the stated date. d. No special control rights or other rights accrue to shares in the capital of the Company. e. A mechanism for verifying compliance with a scheme allowing employees to subscribe for or to acquire shares in the capital of the company or a subsidiary if the employees do not arrange for such verification directly is not applicable to the Company. f. No restrictions apply to voting rights attached to shares in the capital of the Company, nor are there any deadlines for exercising voting rights. The Articles of Association allow the Company to cooperate in the issuance of registered depositary receipts for common shares, but only pursuant to a resolution to that effect of the Board of Directors. The Company is not aware of any depository receipts having been issued for shares in its capital. g. The Company is not aware of the existence of any agreements with Shareholders which may result in restrictions on the transfer of shares or limitation of voting rights except for the shareholders’ agreement, dated December 23, 2015 between Exor (formerly Exor S.p.A.) and Piero Ferrari, which became effective upon the completion of the Separation on January 3, 2016 (the “Shareholders’ Agreement”). The Shareholders’ Agreement includes certain preemption rights of Exor in the event of a proposed transfer of common shares by Piero Ferrari, and certain rights of first offer of Piero Ferrari in the event of a proposed transfer of common shares by Exor, in each case subject to the exceptions set forth in the Shareholders’ Agreement. The Shareholders’ Agreement will remain in force until the fifth anniversary of the Separation provided that if neither of the parties to the Shareholders’ Agreement terminates the Shareholders’ Agreement within six months before the end of the initial term, then the Shareholders’ Agreement shall be renewed automatically for another five year term. h. The rules governing the appointment and dismissal of members of the Board of Directors are stated in the Articles of Association of the Company. All members of the Board of Directors are appointed by the general meeting of Shareholders. The term of office of all members of the Board of Directors is for a period of approximately one year after appointment, such period expiring on the day the first Annual General Meeting of Shareholders is held in the following calendar year. The general meeting of Shareholders has the power to suspend or dismiss any member of the Board of Directors at any time. The rules governing an amendment of the 150 151 ANNUAL REPORT CORPORATE GOVERANCE Articles of Association are stated in the Articles of Association and require a resolution of the general meeting of Shareholders which can only be passed pursuant to a prior proposal of the Board of Directors. i. The general powers of the Board of Directors are stated in the Articles of Association of the Company. For a period of five (5) years from January 2, 2016, the Board of Directors has been irrevocably authorized to issue shares up to the maximum aggregate amount of shares as provided for in the Company’s authorized share capital as set out in Article 4.1 of the Articles of Association, as amended from time to time. The Board of Directors has also been designated for the same period as the authorized body to limit or exclude the rights of pre-emption of shareholders in connection with the authority of the Board of Directors to issue common shares and grant rights to subscribe for common shares as referred to above. In the event of an issuance of special voting shares, shareholders have no right of pre-emptions. The Company has the authority to acquire fully paid-up shares in its own share capital, provided that such acquisition is made for no consideration. Further rules governing the acquisition of shares by the Company in its own share capital are set out in article 8 of the Articles of Association. j. The Company is not a party to any significant agreements which will take effect, will be altered or will be terminated upon a change of control of the Company as a result of a public offer within the meaning of Section 5:70 of the Dutch Financial Supervision Acts (Wet op het financieel toezicht), provided that certain of the loan agreements entered into by the Company contain clauses that, as is customary for financing agreements of similar type, may require early repayment or termination in the event of a change of control of the Company. k. The Company did not enter into any agreement of the company with a director or employee providing for a payment / distribution upon termination of employment as a result of a public offer within the meaning of article 5:70 of the Dutch Financial Supervision Acts. the application if he is not satisfied that the applicants have previously requested the Board of Directors in writing, stating the exact subjects to be discussed, to convene a general meeting of shareholders. General meetings of shareholders shall be held in Amsterdam or Haarlemmermeer (Schiphol Airport), the Netherlands, and shall be called by the Board of Directors, the Chairman or the Chief Executive Officer, in such manner as is required to comply with the law and the applicable stock exchange regulations, not later than on the forty-second day prior to the day of the meeting. All convocations of general meetings of shareholders and all announcements, notifications and communications to shareholders shall be made by means of an announcement on the Company’s corporate website and such announcement shall remain accessible until the relevant general meeting of shareholders. Any communication to be addressed to the general meeting of shareholders by virtue of Dutch law or the Articles of Association, may be either included in the notice, referred to in the preceding sentence or, to the extent provided for in such notice, on the Company’s corporate website and/or in a document made available for inspection at the office of the Company and such other place(s) as the Board of Directors shall determine. Convocations of general meetings of shareholders may be sent to Shareholders through the use of an electronic means of communication to the address provided by such Shareholders to the Company for this purpose. The notice shall state the place, date and hour of the meeting and the agenda of the meeting as well as the other data required by law. An item proposed in writing by such number of Shareholders who, by Dutch law, are entitled to make such proposal, shall be included in the notice or shall be announced in a manner similar to the announcement of the notice, provided that the Company has received the relevant request, including the reasons for putting the relevant item on the agenda, no later than the sixtieth day before the day of the meeting. General Meeting of Shareholders The agenda of the annual general meeting of shareholders shall contain, inter alia, the following items: At least one general meeting of shareholders shall be held every year, which meeting shall be held within a. adoption of the annual accounts; six months after the close of the financial year. Furthermore, general meetings of shareholders shall be held in the case referred to in Section 2:108a of the Dutch Civil Code as often as the Board of Directors, the Chairman or the Chief Executive Officer deems it necessary to hold them or as otherwise required by Dutch law, without prejudice to what has been provided in the next paragraph hereof. Shareholders solely or jointly representing at least ten percent (10%) of the issued share capital may request the Board of Directors, in writing, to call a general meeting of shareholders, stating the matters to be dealt with. If the Board of Directors fails to call a meeting, then such shareholders may, on their application, be authorized by the interim provisions judge of the court (voorzieningenrechter van de rechtbank) to convene a general meeting of shareholders. The interim provisions judge (voorzieningenrechter van de rechtbank) shall reject b. the implementation of the remuneration policy; c. the policy of the Company on additions to reserves and on dividends, if any; d. granting of discharge to the Directors in respect of the performance of their duties in the relevant financial year; e. the appointment of Directors; f. if applicable, the proposal to pay a dividend; g. if applicable, discussion of any substantial change in the corporate governance structure of the Company; and 152 153 ANNUAL REPORT CORPORATE GOVERANCE h. any matters decided upon by the person(s) convening the meeting and any matters placed on the The chairman of the meeting shall decide on the admittance to the meeting of persons other than those agenda with due observance of applicable Dutch law. who are entitled to attend. The Board of Directors shall provide the general meeting of shareholders with all requested information, unless this would be contrary to an overriding interest of the Company. If the Board of Directors invokes an overriding interest, it must give reasons. When convening a general meeting of shareholders, the Board of Directors shall determine that, for the purpose of Article 19 and Article 20 of the Articles of Association, persons with the right to vote or attend meetings shall be considered those persons who have these rights at the twenty-eighth day prior to the day of the meeting (the “Record Date”) and are registered as such in a register to be designated by the Board of Directors for such purpose, irrespective whether they will have these rights at the date of the meeting. In addition to the Record Date, the notice of the meeting shall further state the manner in which shareholders and other parties with meeting rights may have themselves registered and the manner in which those rights can be exercised. The general meeting of shareholders shall be presided over by the Chairman or, in his absence, by the person chosen by the Board of Directors to act as chairman for such meeting. One of the persons present designated for that purpose by the chairman of the meeting shall act as secretary and take minutes of the business transacted. The minutes shall be confirmed by the chairman of the meeting and the secretary and signed by them in witness thereof. For each general meeting of shareholders, the Board of Directors may decide that shareholders shall be entitled to attend, address and exercise voting rights at such meeting through the use of electronic means of communication, provided that shareholders who participate in the meeting are capable of being identified through the electronic means of communication and have direct cognizance of the discussions at the meeting and the exercising of voting rights (if applicable). The Board of Directors may set requirements for the use of electronic means of communication and state these in the convening notice. Furthermore, the Board of Directors may for each general meeting of shareholders decide that votes cast by the use of electronic means of communication prior to the meeting and received by the Board of Directors shall be considered to be votes cast at the meeting. Such votes may not be cast prior to the Record Date. Whether the provision of the foregoing sentence applies and the procedure for exercising the rights referred to in that sentence shall be stated in the notice. Prior to being allowed admittance to a meeting, a shareholder and each person entitled to attend the meeting, or its attorney, shall sign an attendance list, while stating his name and, to the extent applicable, the number of votes to which he is entitled. Each shareholder and other person attending a meeting by the use of electronic means of communication and identified in accordance with the above shall be registered on the attendance list by the Board of Directors. In the event that it concerns an attorney of a shareholder or another person entitled to attend the meeting, the name(s) of the person(s) on whose behalf the attorney is acting, shall also be stated. The chairman of the meeting may decide that the attendance list must also be signed by other persons present at the meeting. The minutes of the general meeting of shareholders shall be made available, on request, to the shareholders no later than three months after the end of the meeting, after which the shareholders shall have the opportunity to react to the minutes in the following three months. The minutes shall then be adopted in the manner as described in the preceding paragraph. The chairman of the meeting may determine the time for which shareholders and others entitled to attend the general meeting of shareholders may speak if he considers this desirable with a view to the orderly conduct of the meeting as well as other procedures that the chairman considers desirable for the efficient and orderly conduct of the business of the meeting. If an official notarial record is made of the business transacted at the meeting then minutes need not Every share (whether common or special voting) shall confer the right to cast one vote. be drawn up and it shall suffice that the official notarial record be signed by the notary. As a prerequisite to attending the meeting and, to the extent applicable, exercising voting rights, the shareholders entitled to attend the meeting shall be obliged to inform the Board of Directors in writing within the time frame mentioned in the convening notice. At the latest this notice must be received by the Board of Directors on the day mentioned in the convening notice. Shareholders and those permitted by Dutch law to attend the general meetings of shareholders may cause themselves to be represented at any meeting by a proxy duly authorized in writing, provided they shall notify the Company in writing of their wish to be represented at such time and place as shall be stated in the notice of the meetings. For the avoidance of doubt, such attorney is also authorized in writing if the proxy is documented electronically. The Board of Directors may determine further rules concerning the deposit of the powers of attorney; these shall be mentioned in the notice of the meeting. The Company is exempt from the proxy rules under the U.S. Securities Exchange Act of 1934, as amended. 154 Shares in respect of which Dutch law determines that no votes may be cast shall be disregarded for the purposes of determining the proportion of shareholders voting, present or represented or the proportion of the share capital present or represented. All resolutions shall be passed with an absolute majority of the votes validly cast unless otherwise specified herein. Blank votes shall not be counted as votes cast. All votes shall be cast in writing or electronically. The chairman of the meeting may, however, determine that voting by raising hands or in another manner shall be permitted. Voting by acclamation shall be permitted if none of the shareholders present or represented objects. No voting rights shall be exercised in the general meeting of shareholders for shares owned by the Company or by a subsidiary of the Company. Pledgees and usufructuaries of shares owned by the Company and its subsidiaries shall however not be excluded from exercising their voting rights, if the right of pledge or usufruct 155 ANNUAL REPORT CORPORATE GOVERANCE was created before the shares were owned by the Company or a subsidiary. Neither the Company nor any of its subsidiaries may exercise voting rights for shares in respect of which it holds a right of pledge or usufruct. Without prejudice to the Articles of Association, the Company shall determine for each resolution passed: a) the number of shares on which valid votes have been cast; b) the percentage that the number of shares as referred to under a. represents in the issued share capital; c) the aggregate number of votes validly cast; and d) the aggregate number of votes cast in favor of and against a resolution, as well as the number of abstentions. In the event of an issuance of common shares every holder of common shares shall have a right of pre- emption with regard to the common shares or rights to subscribe for common shares to be issued in proportion to the aggregate nominal value of his common shares, provided however that no such right of pre-emption shall exist in respect of shares or rights to subscribe for common shares to be issued to employees of the Company or of a group company pursuant to any option plan of the Company. A shareholder shall have no right of pre-emption for shares that are issued against a non-cash contribution. In the event of an issuance of special voting shares to qualifying shareholders, shareholders shall not have any right of pre-emption. The general meeting of shareholders or the Board of Directors, as the case may be, shall decide when passing the resolution to issue shares or rights to subscribe for shares in which manner the shares shall be issued and, to the extent that rights of pre-emption apply, within what period those rights may be exercised. Issuance of shares Corporate offices The general meeting of shareholders or alternatively the Board of Directors, if it has been designated to do so by the general meeting of shareholders, shall have authority to resolve on any issuance of shares and rights to subscribe for shares. The general meeting of shareholders shall, for as long as any such designation of the Board of Directors for this purpose is in force, no longer have authority to decide on the issuance of shares and rights to subscribe for shares. For a period of five years from January 2, 2016 the Board of Directors has been irrevocably authorized to issue shares and rights to subscribe for shares up to the maximum aggregate amount of shares as provided for in the company’s authorized share capital as set out in Article 4.1 of the Articles of Association, as amended from time to time. The general meeting of shareholders or the Board of Directors if so designated in accordance with the Articles of Association, shall decide on the price and the further terms and conditions of issuance, with due observance of what has been provided in relation thereto in Dutch law and the Articles of Association. If the Board of Directors is designated to have authority to decide on the issuance of shares or rights to subscribe for shares, such designation shall specify the class of shares and the maximum number of shares or rights to subscribe for shares that can be issued under such designation. When making such designation the duration thereof, which shall not be for more than five years, shall be resolved upon at the same time. The designation may be extended from time to time for periods not exceeding five years. The designation may not be withdrawn unless otherwise provided in the resolution in which the designation is made. Payment for shares shall be made in cash unless another form of consideration has been agreed. Payment in a currency other than euro may only be made with the consent of the Company. The Board of Directors has also been designated as the authorized body to limit or exclude the rights of pre-emption of shareholders in connection with the authority of the Board of Directors to issue common shares and grant rights to subscribe for common shares as referred to above. The Company is incorporated under the laws of the Netherlands. It has its corporate seat in Amsterdam, the Netherlands, and the place of effective management of the Company is Via Abetone Inferiore n. 4 I-41053 Maranello (MO) Italy. The business address of the Board of Directors and the senior managers is Via Abetone Inferiore n. 4 I-41053 Maranello (MO) Italy. The Company is registered at the Dutch trade register under number 64060977. The Netherlands is the Company’s home member state for the purposes of the EU Transparency Directive (Directive 2004/109/EC, as amended). Internal Control System The Company has in place an internal control system (the “System”), based on the model provided by the COSO Framework (Committee of Sponsoring Organizations of the Treadway Commission Report - Enterprise Risk Management model) and the principles of the Dutch Corporate Governance Code, which consists of a set of policies, procedures and organizational structures aimed at identifying, measuring, managing and monitoring the principal risks to which the Company is exposed. The System is integrated within the organizational and corporate governance framework adopted by the Company and contributes to the protection of corporate assets, as well as to ensuring the efficiency and effectiveness of business processes, reliability of financial information and compliance with laws, regulations, the Articles of Association and internal procedures. The System, which has been developed on the basis of international best practices, consists of the following three levels of control: • Level 1: operating areas, which identify and assess risk and establish specific actions for management of such risk; 156 157 ANNUAL REPORT CORPORATE GOVERANCE • • Level 2: departments responsible for risk control, which define methodologies and instruments for managing risk and monitoring such risk; In accordance with international best practices, the Group has two principal types of control in place: • controls that operate at Group or subsidiary level, such as delegation of authorities and responsibilities, Level 3: Internal Audit department, which conducts independent evaluations of the System in its entirety. separation of duties, and assignment of access rights to IT systems; and Principal Characteristics of the Internal Control System and Internal Control over Financial Reporting The Company has in place a system of risk management and internal control over financial reporting based on the model provided by the COSO Framework, according to which the internal control system is defined as a set of rules, procedures and tools designed to provide reasonable assurance of the achievement of corporate objectives. In relation to the financial reporting process, reliability, accuracy, completeness and timeliness of the information contribute to the achievement of such corporate objectives. Risk management is an integral part of the internal control system. A periodic evaluation of the system of internal control over financial reporting is designed to ensure the overall effectiveness of the components of the COSO Framework (control environment, risk assessment, control activities, information and communication, and monitoring) in achieving those objectives. The Company has a system of administrative and accounting procedures in place that ensure a high degree of reliability in the system of internal control over financial reporting. The approach adopted by the Company for the evaluation, monitoring and continuous updating of the system of internal control over financial reporting, is based on a ‘top-down, risk-based’ process consistent with the COSO Framework. This enables focus on areas of higher risk and/or materiality, where there is risk of significant errors, including those attributable to fraud, in the elements of the financial statements and related documents. The key components of the process are: • identification and evaluation of the source and probability of material errors in elements of financial reporting; • assessment of the adequacy of key controls in enabling ex-ante or ex-post identification of potential misstatements in elements of financial reporting; and • verification of the operating effectiveness of controls based on the assessment of the risk of misstatement in financial reporting, with testing focused on areas of higher risk. Identification and evaluation of the risk of misstatements which could have material effects on financial reporting is carried out through a risk assessment process that uses a top-down approach to identify the organizational entities, processes and the related accounts, in addition to specific activities, which could potentially generate significant errors. Under the methodology adopted by the Company, risks and related controls are associated with the accounting and business processes upon which accounting information is based. Significant risks identified through the assessment process require definition and evaluation of key controls that address those risks, thereby mitigating the possibility that financial reporting will contain any material misstatements. • controls that operate at process level, such as authorizations, reconciliations, verification of consistencies, etc. This category includes controls for operating processes, controls for financial closing processes and cross-sector controls carried out by captive service providers. These controls can be preventive (i.e., designed to prevent errors or fraud that could result in misstatements in financial reporting) or detective (i.e., designed to reveal errors or fraud that have already occurred). They may also be classified as manual or automatic, such as application-based controls relating to the technical characteristics and configuration of IT systems supporting business activities. An assessment of the design and operating effectiveness of key controls is carried out through tests performed by the Internal Audit department, both at group and subsidiary level, using sampling techniques recognized as best practices internationally. The assessment of the controls may require the definition of compensating controls and plans for remediation and improvement. The results of monitoring are subject to periodic review by the manager responsible for of the Company’s financial reporting and communicated by him to senior management and to the Audit Committee (which in turn reports to the Board of Directors). Code of Conduct We have adopted a Code of Conduct which applies to all of our employees, including our principal executive, principal financial and principal accounting officers. Our Code of Conduct is posted on our website at http://corporate.ferrari.com/sites/ferrari15ipo/files/codice_condotta_ferrari_eng_def.pdf. If the provisions of our Code of Conduct that apply to our principal executive officer, principal financial officer or principal accounting officer are amended, or if a waiver is granted, we will disclose such amendment or waiver. The Code of Conduct represents a set of values recognized, adhered to and promoted by the Company which understands that conduct based on the principles of diligence, integrity and fairness is an important driver of social and economic development. The Code of Conduct is a pillar of the governance system which regulates the decision-making processes and operating approach of the Company and its employees in the interests of stakeholders. The Code of Conduct amplifies aspects of conduct related to the economic, social and environmental dimensions, underscoring the importance of dialog with stakeholders. Explicit reference is made to the UN’s Universal Declaration on Human Rights, the principal Conventions of the International Labor Organization (ILO), the OECD Guidelines for Multinational Enterprises and the U.S. Foreign Corrupt Practices Act (FCPA). The Code of Conduct was amended to include specific guidelines relating to: the Environment, Health and Safety, Business Ethics and Anti-corruption, Suppliers, Human Resource Management, Respect of Human Rights, Conflicts of Interest, Community Investment, Data Privacy, Use of IT and Communications Equipment, Antitrust and Export Controls. 158 159 ANNUAL REPORT CORPORATE GOVERANCE The Code of Conduct applies to the directors and all employees of the Company and its subsidiaries and other individuals or companies that act in the name and on behalf of the Company or its subsidiaries. The Company promotes adoption of the Code of Conduct as a best practice standard of business conduct by partners, suppliers, consultants, agents, dealers and others with whom it has a long-term relationship. In fact, the Company’s contracts worldwide include specific clauses relating to recognition and adherence to the principles underlying the Code of Conduct and related guidelines, as well as compliance with local regulations, particularly those related to corruption, money-laundering, terrorism and other crimes constituting liability for legal persons. The Company closely monitors the effectiveness of and compliance with the Code of Conduct. Violations of the Code of Conduct are usually determined through, among other things: periodic activities carried out by the Internal Audit department of the Group; reports received in accordance with the whistleblowing management procedures; and checks forming part of the standard operating procedures. The Internal Audit department investigates violations of the Code of Conduct during standard periodic or specific audits. Periodic reporting is provided to the Chairman and CEO as well as to the Audit Committee. For all Code of Conduct violations, the disciplinary measures taken are commensurate with the seriousness of the case and comply with local legislation. The relevant corporate departments are notified of violations, irrespective of whether criminal action is taken by the authorities. Insider Trading Policy As of January 3, 2016 the Company’s Board of Directors adopted an insider trading policy setting forth guidelines and recommendations to all Directors, officers and employees of the Group with respect to transactions in the Company’s securities. This policy, which also applies to immediate family members and members of the households of persons covered by the policy, is designed to prevent insider trading or allegations of insider trading, and to protect the Company’s for integrity and ethical conduct. Diversity Policy The Board of Directors adopted a diversity policy for the Board of Directors (the “Diversity Policy”) effective as of 31 December 2017, since the Company believes that diversity in the composition of the Board of Directors in terms of age, gender, expertise, professional background and nationality is an important means of promoting debate, balanced decision making and independent actions of the Board of Directors. The Diversity Policy gives weight to the following diversity factors in Board of Directors composition: age, gender, expertise, work and personal background and nationality. The Company considers each of these aspects key drivers to support the above mentioned goals and to achieve sufficient diversity of views and the expertise needed for a proper understanding of current affairs and longer-term risks and opportunities related to the Company’s business. The Board of Directors and its Governance and Sustainability Committee consider such factors when evaluating nominees for election to the Board of Directors and during the annual performance assessment process. The Company has already achieved the following concrete targets: (a) at least 30% of the seats of the Board of Directors are occupied by women and at least 30% by men; and (b) diversity in the age of the members of the Board of Directors by having one or more members of the Board of Directors aged under 50 at the day of their nomination; provided that, in the candidate selection process, rules and generally accepted principles of non-discrimination (on grounds such as ethnic origin, race, disability or sexual orientation) will be taken into account. In addition, the Company aims to achieve within the next several years (from the adoption of the Diversity Policy) the target that the nationality of the members of the Board of Directors shall be reasonably consistent with the geographic presence of the Company’s business, and that no nationality should count for more than 60% of the members of the Board of Directors. To ensure its correct implementation, the Diversity Policy will be taken into account in the nomination of executive Directors, and in the adoption of a profile for non-executive Directors as well as in nominating and recommending non-executive Directors. Since the financial year 2017, the targets relating to gender and age have been realized. Compliance with Dutch Corporate Governance Code The Company endorses the principles and best practice provisions of the Dutch Corporate Governance Code, except for the following best practice provisions which are explained below: • Best practice provision 2.1.7(iii) of the Dutch Corporate Governance Code: for each shareholder, or group of affiliated shareholders, who directly or indirectly hold more than ten percent of the shares in the company, there is at most one supervisory board member who can be considered to be affiliated with or representing them as stipulated in best practice provision 2.1.8, sections vi. and vii. Since our non-executive Director Mr. John Elkann also serves as chairman and chief executive officer of Exor N.V., Mr John Elkann is affiliated with a shareholder holding more than 10% of the shares in the Company. Given the family ties between Mr. Lapo Elkann and Mr. John Elkann, the Company has two non-executive Directors affiliated with a shareholder holding more than 10% of the shares. The composition of the Board of Directors therefore deviates from best practice provision 2.1.7(iii) of the Dutch Corporate Governance Code. The Company believes that Mr. John Elkann and Mr. Lapo Elkann bring valuable contributions to the Board of Directors in light of their knowledge of the automotive and luxury industries, as well as the Company’s business, and therefore the Company believes it is appropriate for both such Directors to participate in the Company’s Board of Directors . For these reasons the Company does not apply this provision of the Dutch Corporate Governance Code. • Best practice provision 2.2.4 of the Dutch Corporate Governance Code: The supervisory board should also draw up a retirement schedule in order to avoid, as much as possible, supervisory board members retiring simultaneously. The retirement schedule should be published on the company’s website. The Company does not have a retirement schedule as referred to in best practice provision 2.2.4 of the Dutch Corporate Governance Code, because the Company’s Articles of Association provide for a term of office of member of the Board of Directors for a period of approximately one year after appointment, such period expiring on the day the first annual general meeting of shareholders is held in the following calendar year. Short terms of office for board members are customary for companies listed in the U.S. As the Company is listed on the NYSE, the Company also relies on certain U.S. governance policies, one of which is the reappointment of our Directors at each annual general meeting of shareholders. In light of this term of office, the Company does not have a retirement schedule in place. 160 161 ANNUAL REPORT CORPORATE GOVERANCE • Best practice provision 2.3.4 of the Dutch Corporate Governance Code: More than half of the members of the committees should be independent within the meaning of best practice provision 2.1.8.. Mr. John Elkann and Mr. Piero Ferrari, being non-independent non-executive Directors, have a position on the Governance and Sustainability Committee to which best practice provision 2.3.4 of the Dutch Corporate Governance Code applies. Consequently, only two out of four members of the Governance and Sustainability Committee are independent. The position of Mr. Elkann and Mr. Ferrari in this committee inter alia follows from the duties of the governance and sustainability committee, which are more extensive than the duties of a selection and appointment committee. These duties warrant participation of Mr. Ferrari, the son of Ferrari’s founder, and Mr. John Elkann, who each bring valuable contributions to the Board in light of their knowledge of the automotive and luxury industries, as well as the Company’s business, and therefore the Company believes it is appropriate for such Directors to participate in the Company’s Governance and Sustainability Committee. The current Governance and Sustainability Committee is composed by four members two of which are independent and therefore no more than two members are non-independent according to Company’s Charter of the Governance and Sustainability Committee. • Best practice provision 4.1.8 of the Dutch Corporate Governance Code: Management board and supervisory board members nominated for appointment should attend the general meeting at which votes will be cast on their nomination. Pursuant to best practice provision 4.1.8 of the Dutch Corporate Governance Code, every executive and non-executive Director nominated for appointment should attend the general meeting at which votes will be cast on its nomination. Since, pursuant to Article 14.3 of the Articles of Association, the term of office of Directors is approximately one year, such period expiring on the day the first annual general meeting of shareholders of the Company is held in the following calendar year, all members of the Board of Directors are nominated for (re)appointment each year. By publishing the relevant biographical details and curriculum vitae of each nominee for (re)appointment, the Company ensures that the Company’s general meeting of shareholders is well informed in respect of the nominees for (re)appointment and in practice only the executive Director and the Vice-Chairmen non-executive Directors will therefore be present at the general meeting. REPORT OF THE NON-EXECUTIVE DIRECTORS Introduction This is the report of the non-executive Directors of the Company over the financial year 2017 as referred to in best practice provision 5.1.5 of the Dutch Corporate Governance Code. It is the responsibility of the non-executive Directors to supervise the policies carried out by the executive Directors and the general affairs of the Company and its affiliated enterprise, including the implementation of the strategy of the Company regarding long-term value creation. In so doing, the non-executive Directors act solely in the interest of the Company. With a view to maintaining supervision on the Company, the non- executive Directors regularly discuss Ferrari’s long-term business plans, the implementation of such plans and the risks associated with such plans with the executive Directors. Ferrari (executive Directors) and members not having such day-to-day responsibility (non-executive Directors). The tasks of the executive and non-executive Directors in a one-tier board such as the Company’s Board of Directors may be allocated under or pursuant to the Articles of Association, provided that the general meeting of shareholders has stipulated whether such Director is appointed as executive or as non-executive Director and furthermore provided that the task to supervise the performance by the Directors of their duties can only be performed by the non-executive Directors. Regardless of an allocation of tasks, all Directors remain collectively responsible for the proper management and strategy of the Company (including supervision thereof in case of non-executive Directors). Details of the current composition of the Board of Directors, including the non-executive Directors, and its committees are set forth in the section “Board of Directors”. Supervision by the non-executive Directors The non-executive Directors supervise the policies carried out by the executive Directors and the general affairs of the Company and its affiliated enterprise. In so doing, the non-executive Directors have also focused on the effectiveness of the Company’s internal risk management and control systems, the integrity and quality of the financial reporting and Ferrari’s long-term business plans, the implementation of such plans and the risks associated. Due to the revised Dutch Corporate Governance Code becoming applicable with regard to the financial year 2017, the non-executive Directors and especially the members of the Governance and Sustainability Committee spent significant time during the past year to assess the required amendments and arrange for revised updates of the various corporate governance documents of the Company to align those to the current Dutch Corporate Governance Code. The non-executive Directors also determine the remuneration of the executive directors and nominate candidates for the Director appointments. Furthermore, the Board of Directors may allocate certain specific responsibilities to one or more individual directors or to a committee comprised of eligible Directors of the Company and subsidiaries of the Company. In this respect, the Board of Directors has allocated certain specific responsibilities to the Audit Committee, the Compensation Committee and the Governance and Sustainability Committee. Further details on the manner in which these committees have carried out their duties, are set forth in the sections “The Audit Committee”, “The Compensation Committee” and “The Governance and Sustainability Committee”. The non-executive Directors supervised the adoption and implementation of the strategies and policies by the Group, reviewed this annual report, including the Remuneration Report and the Group’s financial results, received updates on legal and compliance matters and they have been regularly involved in the review and approval of transactions entered into with related parties. The non-executive Directors have also reviewed the reports of the Board of Directors and its committees and the recommendations for the appointment of Directors. The Board of Directors has furthermore proposed amendments to the Remuneration Policy, which were adopted by the general meeting on 14 April 2017. According to the Articles of Association, the Board of Directors is a single board and consists of three or more members, comprising both members having responsibility for the day-to-day management of During 2017, there were three meetings of the Board of Directors. Portions of these meetings took place without the executive Directors being present. The average attendance at those meetings was 94.87 percent. 162 163 ANNUAL REPORT CORPORATE GOVERANCE An overview of the attendance of the individual Directors per meeting of the Board of Directors and its committees set out against the total number of such meetings is set out below: Director of the Board of Directors, is independent under the Dutch Corporate Governance Code in accordance with best practice provision 2.1.9 of the Dutch Corporate Governance Code. Name Meeting Board of Directors Audit Committee Governance and Sustainability Committee Compensation Committee Sergio Marchionne John Elkann Piero Ferrari Louis C. Camilleri Delphine Arnault Giuseppina Capaldo Eddy Cue Sergio Duca Lapo Elkann Amedeo Felisa Maria Patrizia Grieco Adam Keswick Elena Zambon 3/3 3/3 3/3 3/3 3/3 3/3 3/3 3/3 3/3 3/3 3/3 2/3 2/3 0 0 0 0 0 9/9 0 9/9 0 0 9/9 0 0 0 1/1 1/1 0 0 0 1/1 1/1 0 0 0 0 0 0 1/1 0 1/1 0 0 0 0 0 0 0 0 1/1 During these meetings, key topics discussed were, amongst others: the Group’s strategy, the Group’s financial results and reporting, sustainability, acquisitions and divestments, executive compensation, technological developments, risk management, updates on legal and compliance, risk management, human resources with the Head of Human Resources, implementation of the Remuneration Policy and the Remuneration Report. Independence of the non-executive Directors The non-executive Directors are required by Dutch law to act solely in the interest of the Company. The Dutch Corporate Governance Code stipulates the corporate governance rules relating to the independence of non-executive Directors and requires under most circumstances that a majority of the non-executive Directors be “independent.” Currently, nine out of twelve non-executive Directors are considered to be independent under the NYSE definition while eight non-executive Directors are considered to be independent under the Dutch Corporate Governance Code. Mr. Amedeo Felisa, Mr. Piero Ferrari, Mr. John Elkann and Mr. Lapo Elkann are considered not to be independent under the Dutch Corporate Governance Code. Mr. Amedeo Felisa is the former CEO of Ferrari and Mr. Piero Ferrari holds approximately 10 percent of our outstanding common shares. In addition Mr. Lapo Elkann and Mr. John Elkann are not considered independent for the reasons set forth in the section “Compliance with Dutch Corporate Governance Code”. Mr. Louis C. Camilleri, the Senior Non-Executive Although it wishes to state that best practice provision 2.1.7 (iii) of the Dutch Corporate Governance Code is not complied with given that more than one non-executive directors are affiliated with Ferrari’s largest shareholder, Exor N.V. and notwithstanding the foregoing regarding the non-independent directors, Ferrari is of the opinion that the independency requirements as referred to in best practice provision 2.1.10 of the Dutch Corporate Governance Code are otherwise met by the Company. Evaluation by the non-executive Directors The non-executive Directors are responsible for supervising the Board of Directors and its committees, as well as the individual executive and non-executive Directors, and are assisted by the Governance and Sustainability Committee in this respect. In accordance with the Governance and Sustainability Committee Charter, the Governance and Sustainability Committee assists and advises the Board of Directors with respect to periodic assessment of the performance of individual Directors. In this respect, the Governance and Sustainability Committee has, amongst others, the duties and responsibilities to review annually the Board of Directors’ performance and the performance of its committees and to review each Director’s continuation on the Board of Directors at appropriate regular intervals as determined by the Governance and Sustainability Committee. In 2017, the Governance and Sustainability Committee’s periodic assessments took place during the meeting held on 1 March 2017. During that meeting, the Governance and Sustainability Committee focused on the results of the periodic assessments and the performance of the Board of Directors, its committees and the individual Directors, keeping also into account the self-assessment prepared by each Director. During such meeting the Governance and Sustainability Committee dealt also with the directors’ nomination process, the assessment of Directors’ qualifications, the size and composition of the Board of Directors and the committees, and the recommendations for Directors’ election. The Governance and Sustainability Committee also reviewed purpose, structure, operations and charter of each of the committees, assessing the required amendments to align the various corporate governance documents to the revised Dutch Corporate Governance Code. In addition the Committee reviewed the process for 2018 Board and Committees’ self-assessment. The non-executive Directors have been regularly informed by each committee as referred to in best practice provision 2.3.5 of the Dutch Corporate Governance Code and the conclusions of those committee were taken into account when drafting this report of the non-executive Directors. The non-executive Directors were able to review and evaluate the performance of the Audit Committee, the Governance and Sustainability Committee and the Compensation Committee based on the assessments made by the Governance and Sustainability Committee. The self-assessment of the Committees were also discussed by the Board of Directors. The outcome of the evaluations is that there is no need to amend the size or composition of the Audit Committee, the Governance and Sustainability Committee and the Compensation Committee, nor is there any reason to amend their charters on this basis. Further details on the manner in which these committees have carried out their duties, are set forth in sections “The Audit Committee”, “The Compensation Committee” and “The Governance and Sustainability Committee”. 164 165 ANNUAL REPORT CORPORATE GOVERANCE On the basis of the preparations by the Governance and Sustainability Committee, the non-executive Directors were able to review the Board of Director’s assessments, the individual Directors’ assessments and the recommendation for Directors’ election, as well as the amendments of the Board regulations, the Committee’s charters and other corporate documentation. The Board of Directors concluded that each of the Directors continues to demonstrate commitment to its respective role in the Company. Also, pursuant to the Compensation Committee Charter, the Compensation Committee implements and oversees the remuneration policy as it applies to non-executive Directors, executive Directors and senior officers reporting directly to the executive Directors. The Compensation Committee administers all the equity incentive plans and the deferred compensation benefits plans. On the basis of the assessments performed, the non-executive Directors determine the remuneration of the executive directors and nominate candidates for the Director appointments. The non-executive Directors have supervised the performance of the Audit Committee, the Compensation Committee and the Governance and Sustainability Committee. STATEMENT BY THE BOARD OF DIRECTORS Based on the assessment performed, the Board of Directors believes that, as of December 31, 2017, the Group’s and the Company’s Internal Control over Financial Reporting is considered effective and that (i) the Board Report provides sufficient insights into any material weaknesses in the effectiveness of the internal risk management and control systems, (ii) the internal risk management and control systems are designed to provide reasonable assurance that the financial reporting does not contain any material inaccuracies, (iii) based on the current state of affairs, it is justified that the Group’s and the Company’s financial reporting is prepared on a going concern basis, and (iv) the Board Report states those material risks and uncertainties that are, in the Board of Director’s judgment, relevant to the expectation of the Company’s continuity for the period of twelve months after the preparation of the Board Report. February 23, 2018 Sergio Marchionne Chairman and Chief Executive Officer RESPONSIBILITIES IN RESPECT TO THE ANNUAL REPORT The Board of Directors is responsible for preparing the Annual Report, inclusive of the Consolidated and Company Financial Statements and Board Report, in accordance with Dutch law and International Financial Reporting Standards as issued by the International Accounting Standards Board and as adopted by the European Union (IFRS). In accordance with Section 5:25c, paragraph 2 of the Dutch Financial Supervision Act, the Board of Directors states that, to the best of its knowledge, the Consolidated and Company Financial Statements prepared in accordance with IFRS as adopted by the European Union provide a true and fair view of the assets, liabilities, financial position and profit or loss for the year of the Company and its subsidiaries and that the Board Report provides a true and a fair view of the performance of the business during the financial year and the position at balance sheet date of the Company and its subsidiaries, together with a description of the principal risks and uncertainties that the Company and the Group face. February 23, 2018 Board of Directors Sergio Marchionne John Elkann Piero Ferrari Delphine Arnault Louis C. Camilleri Giuseppina Capaldo Eddy Cue Sergio Duca Lapo Elkann Amedeo Felisa Maria Patrizia Grieco Adam Keswick Elena Zambon 166 167 ANNUAL REPORT NON-FINANCIAL STATEMENT About Ferrari Ferrari is among the world’s leading luxury brands focused on the design, engineering, production and sale of the world’s most recognizable luxury performance sports cars. Our brand symbolizes exclusivity, innovation, state-of-the-art sporting performance and Italian design and engineering heritage. Our name and history and the image enjoyed by our cars are closely associated with our Formula 1 racing team, Scuderia Ferrari, the most successful team in Formula 1 history. From the inaugural year of Formula 1 in 1950 through the present, Scuderia Ferrari has won 229 Grand Prix races, 16 Constructor World titles and 15 Drivers’ World titles. We believe our history of excellence, technological innovation and defining style transcends the automotive industry, and is the foundation of the Ferrari brand and image. We design, engineer and produce our cars in Maranello, Italy, and sell them in over 60 markets worldwide through a network of 164 authorized dealers operating 185 points of sale. Our Strategy Our strategy focuses on maintaining our leading position in the luxury performance sports car market, enhancing and protecting the value and exclusivity of the Ferrari brand. We focus on cost-efficiencies and aim to achieve profitable growth by pursuing the following strategies. Controlled growth in developed and emerging markets Regular new model introductions and enhancements Pursue excellence in racing Controlled growth in adjacent luxury and lifestyle categories Materiality Matrix of Ferrari Group We have updated the analysis of the most relevant sustainability topics (materiality analysis) for us and our stakeholders as disclosed in last year’s annual report in order to identify strategic priorities with defined actions. In the first phase of the analysis, the topics potentially relevant to our Group and our stakeholders were identified. This was done by taking into consideration sector benchmarking analysis, UN Sustainable Development Goals (SDGs), online press reviews, international studies and publications such as the “Sustainability Topics for Sectors: What do stakeholders want to know?” (GRI, 2013). During the second phase, the Group’s senior management, together with a sample of stakeholders, assessed through a questionnaire the relative importance of the identified topics for our Group and our stakeholders (as described in the Stakeholder engagement paragraph). In order to identify any relevant change in our business context and strategy, this quantitative analysis has been updated in 2017 and has been complemented by a qualitative analysis which resulted in the materiality matrix below. MATERIALITY MATRIX OF FERRARI GROUP S R E D L O H E K A T S R O F E C N A V E L E R t n a t r o 5,80 p m i y r e V 5,30 4,80 4,30 t n a t r o p m 3,80 I Innovation: technology and design Image and brand reputation Quality and safety of products and customers Customer satisfaction Emissions Sport fair play Relationship with sponsor Health and safety Human capital Ethical business conduct Diversity, inclusion and non-discrimination Education Selection and research of raw materials Attention to enthusiasts Risk management & Compliance Environmental commitment Economic and financial performance Supply chain responsible management Responsible communication and marketing Relationship with Institutions and Authorities Local communities Industrial relations 3,80 Important 4,30 4,80 5,30 RELEVANCE FOR FERRARI GROUP Work-life balance and employees wellness LEGEND: Governance and Economic Responsibility Product Responsibility People Responsibility Environmental Responsibility Social Responsibility 5,80 Very important The materiality matrix highlights the assessed aspects that are most relevant for the Group and our stakeholders and therefore represent our strategic sustainability priorities, for which actions will be defined. This materiality matrix translated into our sustainability approach characterized by: 1. A high attention and care for products and relationships with clients 1.1 Image and brand reputation 1.2 Quality and safety of products and customers 1.3 Innovation: technology and design 2. Feasible thanks to the effort of the people working in Ferrari 2.1 Human capital 2.2 Work-life balance and employees’ wellness 168 169 ANNUAL REPORT NON-FINANCIAL STATEMENT 3. A specific focus on compliance and a strong business ethic The high attention and care towards our products is the foundation upon which our success is built, 3.1 Ethical business conduct and, sports and fair play 3.2 Emissions 3.3 Risk management and compliance 4. Keeping the essence of Ferrari alive 4.1 Engagement with enthusiasts 4.2 Relationships with sponsors Stakeholder engagement As an international firm with ambitious corporate objectives and a complex value chain, we need to develop forms of communication and collaboration with both our internal and external stakeholders that allow us to understand their various needs, interests and expectations. and this is feasible thanks to the efforts of our employees. We depend on a significant number of suppliers who play an important part in the success of the Group: for the sourcing of certain key components with highly technological specifications, we have developed strong synergistic relationships with some of our suppliers, which are considered “key strategic innovation partners”. We have invested heavily to minimize our environmental impact. Our vehicles must comply with extensive regional, national and local laws and regulations, and industry self-regulations (including those that regulate vehicle safety). We are a dual-listed company, therefore, the financial discipline enhanced by the relationship with shareholders and investors supports the company in pursuing its own business targets. Furthermore, we collaborate with universities and high schools to provide scholarships to exceptional A review of relevant stakeholder groups has been conducted in conjunction with the materiality analysis, addressing material aspects based on their importance to internal and external stakeholders. students. This Statement is addressed to all the stakeholders involved in our activities, as indicated in the following picture: Considering the rising environmental and social changes, these activities are an important part of the sustainability strategy to help us in identifying our sustainability risks and opportunities, as well as to support management in reaching our objectives. Our Sustainability Governance Pursuant to the charter of the Governance and Sustainability Committee, adopted by the Board of Directors on February 23, 2018, the function of the Governance and Sustainability Committee is to assist the board of Directors with respect to the determination of, inter alia: (i) drawing up the selection criteria and appointment procedures for members of the Board of Directors; (ii) periodic assessment of the size and composition of the Board of Directors; (iii) periodic assessment of the performance of individual directors and reporting this to the Board of Directors; (iv) proposals for appointment and reappointments of executive and non- executive directors. The Governance and Sustainability Committee shall be comprised of at least three (3) directors, at most one (1) of whom may be an executive director and at least half of whom will be independent within the meaning of the Code, elected by the Board of Directors. The Governance and Sustainability Committee currently consists of Mr. Elkann (Chairperson), Mr. Cue, Mr. Duca and Mr. Ferrari. In 2017 the Governance and Sustainability Committee met once. Integrity of Business Conduct With regard to stakeholder involvement, we support our brand value by promoting a strong connection with the Ferrari community: our enthusiasts and clients. We focus on strengthening this connection by rewarding our most loyal clients through a range of initiatives. The foundation of Ferrari’s governance model is the Code of Conduct that reflects our commitment to a culture dedicated to integrity, responsibility and ethical behavior. Ferrari endorses the United Nations (“UN”) Declaration on Human Rights, the International Labor Organization (“ILO”) Conventions and the Organization for Economic Co-Operation and Development (“OECD”) Guidelines for Multinational Companies. Accordingly, 170 171 ANNUAL REPORTEnthusiastsEnvironmentClientsBusiness and licensing partnersGovernment, Regulators and Sport InstitutionsEmployees and trade unionsSponsorsCommunity andUniversity Media and InfluencerSuppliersInvestors and ShareholdersDealers NON-FINANCIAL STATEMENT the Code of Conduct is intended to be consistent with such guidelines and aims to ensure that all members of Ferrari Group’s workforce act with the highest level of integrity, comply with applicable laws, and build a better future for our Company and the communities in which we do business. Ferrari’s integrity system is comprised of these primary elements: • Principles that capture the Company’s commitment to important values in business and personal conduct • Practices that are the basic rules that must guide our daily behaviors required to achieve our overarching Principles • Procedures that further articulate the Company’s specific operational approach to achieving compliance and that may have specific application limited to certain geographical regions and/or businesses as appropriate. Our Code of Conduct is approved by the board of directors of Ferrari N.V. and applies to all board members and officers, as well as full-time and part-time employees of the Ferrari Group. The Code of Conduct also applies to all temporary, contract and all other individuals and companies that act on behalf of the Ferrari Group. The Internal Audit department investigates possible violations of the Code of Conduct during standard periodic audits and through specific Business Ethics Compliance (BEC) Audits. The company’s policies includes policies for respecting Human Rights which prohibits child and forced labor and pays attention to safe working environment for our employees. Anti-Bribery and Corruption Included in Ferrari’s Code of Conduct are, among others, rules related to anti-bribery, anti-corruption, competitive behavior and conflicts of interest. Ferrari is committed to the highest standards of integrity, honesty and fairness in all internal and external affairs and will not tolerate any kind of bribery. The laws of virtually all countries in which Ferrari operates prohibit bribery. Ferrari’s policy is that no one - director, officer, or other employee, agent or representative - shall, directly or indirectly, give, offer, request, promise, authorize, solicit or accept bribes or any other perquisite (including gift or gratuities with the exception of commercial items universally accepted in an international context of modest economic value, permitted by applicable laws and in compliance with the Code of Conduct and all applicable practices and procedures) in connection with their work for Ferrari at any time or for any reason. individuals, which can result in significant fines, reputational damage and imprisonment of individuals. Whistleblowing Violations of the Code of Conduct are determined through periodic activities carried out by our Internal Audit department, through the analysis of the reports received in accordance with the Ethics Helpline Management Procedures and through checks forming part of the standard operating procedures. The Ethics Helpline is a dedicated channel that allows employees, suppliers, dealers, consumers and other stakeholders to request advice about the application of the Code of Conduct, and to report any concerns about alleged situations, events, or actions that they believe may be inconsistent with the Code of Conduct. Stakeholders can also report alleged violations anonymously. The Ethics Helpline can be accessed either by phone or by web intake (with multiple language available) and is an essential element of the management process, in accordance with the Code of Conduct, in relation to raised concerns. It is managed by an independent provider, available 24 hours a day, seven days a week. Furthermore, Ferrari employees may also seek advice concerning the application and interpretation of the Code of Conduct by contacting their immediate supervisor, Human Resources representatives, or the Legal Department. The Internal Audit and Legal departments assess all the allegations received, and the results and potential disciplinary actions are reported based on the necessary escalation process (the relevant internal functions are notified of the violations). On November 15, 2017, Italy’s law for whistleblowing, which contains provisions for the protection of reporters of crimes or irregularities that have come to light in the context of a public or private employment relationship, was definitively adopted (Law n. 179/2017). The law concerns the protection of workers, public or private, who report or denounce crimes or other illegal conduct which they have come to know about in the context of their employment relationship. Our whistleblowing procedures are already in line with the new provisions of Law n.179/2017. The violations of the Code of Conduct have been categorized according to the Principles of the Code of Conduct. Accordingly, Managing Our Assets and Information includes Communicating Effectively, Protecting Ferrari Assets and Maintaining Appropriate Records. The category Interacting with External Parties comprises Avoiding Conflicts of Interest and Supporting Our Communities. Conducting Business covers Sustainably Purchasing Goods or Services, Transacting Business Legally and Engaging in Sustainable Practices. Finally, Protecting Our Workforce includes behaviours related to Maintaining a Fair and Secure Workplace, and Ensuring Health and Safety. For all Code of Conduct violations, the disciplinary measures taken are commensurate with the seriousness of the case and comply with local legislation. WHISTLEBLOWING REPORTING AS OF DECEMBER 31, 2017 Category Interacting with external parties Managing our assets and information Protecting our workforce Total Reports received in 2017 Total 2017 reports closed Reports in which a violation was confirmed 3 6 2 11 22 3 6 1 8 18 3 2 0 1 6 Periodic reporting is provided to the Chairman and CEO as well as to the Audit Committee. A violation of anti-bribery and anti-corruption laws is a serious offense for both companies and Conducting business 172 173 ANNUAL REPORT NON-FINANCIAL STATEMENT Sustainability Risks We are committed to create a culture of sustainability. Creating such a culture requires effective risk management, responsible and proactive decision-making and innovation. Our efforts are aimed at minimizing the negative impacts of our business. Our risk management approach is an important business driver and it is integral to the achievement of the Group’s long-term business plan. We take an integrated approach to risk management, where risk and opportunity assessments are at the core of the leadership team agenda. The Board of Directors is responsible for considering the ability to control strategic, operational, compliance, financial and reporting risks crucial to achieving its identified business targets, and for the continuity of the Group. Ferrari has adopted the COSO Framework (Committee of Sponsoring Organizations of the Treadway Commission Report - Enterprise Risk Management Model) as the foundation of its risk management framework. The Group Executive Council (“GEC”), which is supported by senior management, is responsible for identifying, prioritizing and mitigating risks and for the establishment and maintenance of a risk management system across our business functions. At least annually, our risk management framework and risks are discussed with the Group’s Audit Committee. We have integrated the analysis and assessment of socio-environmental risks in our risk management framework and are currently integrating our risk management activities with the outcomes of the materiality analysis described in the paragraph “Materiality analysis”. In particular, the most material topics identified by Ferrari are strongly connected with the following key risks and risk trends: Topics Image and brand reputation Innovation: technology and design Customer satisfaction Key risks and risk trends Brand Image Brand image; Competition Brand image; Competition The preservation and enhancement of the value of the Ferrari brand is crucial in driving demand for our cars and our revenues. The perception and recognition of the Ferrari brand are of strategic importance and depend on many factors such as the design, technology, performance, quality and image of our cars, the appeal of our dealerships and stores, the success of our client activities, as well as our general profile, including our brand’s image of exclusivity. The prestige, identity and appeal of the Ferrari brand also depend on the continued success of the Scuderia Ferrari racing team in the Formula 1 World Championship. We believe that we compete primarily thanks to our brand image, the performance and design of our cars, our reputation for quality and the driving experience for our customers. Topics Key risks and risk trends Ethical business conduct Emissions Risk management and Compliance Quality and safety of products and customers Non-compliance with laws, regulations, local standards (including tax) and codes Non-compliance with laws, regulations, local standards (including tax) and codes Non-compliance with laws, regulations, local standards (including tax) and codes Non-compliance with laws, regulations, local standards (including tax) and codes We are subject to comprehensive and constantly evolving laws, regulations and policies throughout the world. In Europe and the United States, for example, significant governmental regulation is driven by environmental, fuel economy, vehicle safety and noise emission concerns and regulatory enforcement has become more active in recent years. Topics Human capital Health and Safety Key risks and risk trends Attraction, development and retention of talents Attraction, development and retention of talents Our success depends on the ability of our senior executives and other members of management to effectively manage individual areas of our business and our business as a whole. If we are unable to attract, retain and incentivize senior executives, drivers, team managers and key employees to succeed in international competitions or devote the capital necessary to fund successful racing activities, new models and innovative technology, this may adversely affect potential clients’ enthusiasm for the Ferrari brand and their perception of our cars, which could have an adverse effect on our business, results of operations and financial condition. A detailed description of how we respond to these risks can be found in the section “Risk, Risk Management and Control Systems” of 2017 Annual Report. Product Responsibility Research, Innovation and Technology Innovation is in our DNA and we will continue pushing boundaries to respond to customers’ desires, always setting new standards in the “Ferrari way”. Innovation drives products and processes which represent one of our key differentiating factors. This is why we are focused on developing new technologies and distinctive designs. Participation in the Formula 1 world championship with Scuderia Ferrari is an important source of technological innovation, which is then transferred into Sports and GT cars. The product development efforts continually focus on improving core components, such as the powertrain and the car dynamics, vehicle safety, as well as the use of materials such as special aluminum alloys and carbon fiber. Throughout our history, we have registered various patents, some of which were genuinely revolutionary. 174 175 ANNUAL REPORT NON-FINANCIAL STATEMENT One of our other focuses is on innovating our working methods, which involves stimulating the creativity of our employees. With this in mind, we have implemented programs designed to encourage the development of ideas and solutions that will improve products, methods and the working environment. Pole Position Evo, for instance, rewards ideas put forward by individual staff members. In 2017, we received more than 7,600 suggestions from employees (+13% vs. 2016). In recent years, several of our innovations have been recognised, for instance, by winning the International Engine of the Year award in both 2016 and 2017. Technological breakthroughs are then enhanced through design. In 2010, the Ferrari Design Center was established as a best-in-class in-house design department to improve our control over the design process and to ensure long-term continuity of the Ferrari style. The Design team has been presented with several design awards such as the Red Dot Best of the Best award which was granted for three years in a row (2015 - 2017). We relish new challenges and are now working hard on the integration of hybrid technology more broadly into our car portfolio. The R&D investments and expenses to fuel the growth of our Group are represented in the charts below. Customer Satisfaction We are devoted to the highest level of customer satisfaction. We have a structured process to assess the overall customer satisfaction on product, service provided, events organized by us and the overall customer experience with the car. Specific KPIs are constantly monitored and analyzed by the marketing department. The KPIs are measured through bespoke surveys for each car launch and collected for every new model, from range vehicles to special and limited editions. A similar approach is followed for evaluating the quality of service and satisfaction of events. The results of the product and service satisfaction analyses are used to outline any necessary action plan for current models and, additionally, to identify potential features to be added to the next generation of vehicles. Recent surveys show that customer satisfaction for Ferrari products and services has constantly stayed at a very high level. The below chart shows the flow between us and our clients: Ferrari Clients Dealers Area Manager & HQ s e r i a n n o i t s e u Q s e i r i u q n I s e i l p e R s e i r i u q n I s d r a c e r o c S s t r o p e R Customer Care & Marketing Department Reports Feedback Department & Production (for future models) (for current models) We have developed an integrated system between our customer care, dealers, marketing department, and area managers, to track all contact with clients and to share and manage inquiries and the results of customer satisfaction analysis. Customers’ Privacy Customer information is one of Ferrari’s cornerstones and a key component of our competitive advantage. According to the current legislation, the protection of the customers’ privacy is regulated by the upcoming new General Data Protection Regulation “GDPR” (EU Regulation 2016/679), which is entering into force on May, 25th 2018 and will replace the previous EU regulation and the national data protection laws. The new regulation requires the application of increased transparency obligations, the introduction of common records of processing activities and - where advisable - privacy impact assessments. Within this context, in 2017 we embarked on a path to ensure full compliance with the new regulation. 176 177 150 ANNUAL REPORT NON-FINANCIAL STATEMENT Vehicle Safety Vehicle safety is among our top priorities and Ferrari cars are always designed and manufactured with the safety of our customers and other road users in mind. Given the nature of our cars, the electronic equipment is developed with an integrated approach, ensuring the best balance between safety, control and best-in-class performance, to always maintain Ferrari DNA of driving emotions. All of our range models are subject to a series of tests to obtain approval from the relevant authorities. Moreover, we start assessing all our new models at an early stage of planning and design to identify areas of improvement. Vehicle safety is the starting point for the guidelines passed down to the engineers that participate in the design of every component, from the car framework to the end. Moreover, specific devices are installed in racing cars to obtain FIA (Federation International de l’Automobile) approval. Ferrari promotes socially responsible sourcing by making reasonable effort to trace the source of conflict minerals contained in our products. The complex global challenge of managing multiple layers of suppliers is a driving force in working with peers to address ethical and social sourcing risks. Ferrari has developed strategies addressing Section 1502 of the Dodd-Frank Act, as well as subsequent rules promulgated by the U.S. Securities and Exchange Commission (SEC), regarding conflict minerals. The rule requires companies to determine whether tin, tantalum, tungsten, or gold (3TG) in their supply chain originated from the Democratic Republic of the Congo (DRC) or surrounding countries, and if the sale of those minerals supported the armed conflict in the DRC. Therefore, Ferrari is currently surveying whether and to what extent any of Tantalum, Tin, Tungsten (and the minerals that they are derived from - Columbite-tantalite (coltan), cassiterite and wolframite and Gold) are necessary to the functionality or production of a product manufactured by Ferrari or contracted by Ferrari to be manufactured, with a view to designing appropriate policies and procedures specifically applicable to the supply chain for those minerals. With the aim of solving issues beforehand and reducing the environmental impact of these activities, all tests are reproduced in a state-of-the-art virtual environment before conducing them with real cars. Prior to being delivered, every Ferrari, complete a 40-Kilometer road test-drive. In addition, Ferrari is obtaining conflict minerals reporting information through the iPoint Conflict Minerals Platform (iPCMP), a web-based data management tool based on the Conflict Minerals Reporting Template. For more details, please refer to the “Regulatory Matters-Vehicle Safety” paragraph of 2017 Annual Report. Responsible Supply Chain Our focus on excellence, in terms of luxury, quality, aesthetics and performance, requires us to implement a responsible and efficient supply chain management in order to select suppliers and partners that are able to meet our high standards. We source a variety of components (among which transmissions, brakes, driving-safety systems and others), raw materials (such as aluminum and precious metals), supplies, utilities, logistics and other services from numerous suppliers. All suppliers must respect the Ferrari Code of Conduct, which includes the set of values recognized, adhered to and promoted by the Company. The Code of Conduct was updated to include specific guidelines relating to the respect of human rights and conflicts of interest. The Ferrari Group made its best effort to ensure that the Code is regarded as a best practice of business conduct and followed by third parties, including long lasting relationship business partners such as suppliers, dealers, advisors and agents. Ferrari reviews the information and works with suppliers to ensure the fulfillment of due diligence obligations under the SEC conflict minerals rule. Ferrari’s initial public offering was completed in October 2015 and, in accordance with the rules and regulations of the U.S. Securities and Exchange Commission applicable to Ferrari, Ferrari expects to file its first report relating to conflict minerals in May 2018, if any will be required, with respect to the calendar year 2017. Our people The high attention and care for our products is the foundation upon which Ferrari’s success is built and this is feasible thanks to the efforts of the people working in Ferrari. One of the many strengths is the ability to attract, retain and develop talents. Since 1997, we have developed the “Formula Uomo” initiative, with the intention of developing a high quality working life for our employees. Over the years, the project has become a pillar of our culture, based on redesigning the working environment, enforcing a safety-first culture, enabling individual development, enhancing teamwork and building a community now comprising 40 different nationalities. Conflict minerals Working environment Ferrari supports the goal of preventing the exploitation of minerals violating human rights. As part of Ferrari’s commitment to respect and promote human rights and the sustainability of its operations, Ferrari selects suppliers based not only on the quality and competitiveness of their products and services, but also on their adherence to social, ethical and environmental principles, as outlined in Ferrari’s Code of Conduct. We know that the best individual and team performance is only achieved if employees feel they are in the right environment. We also believe that the quality of our products cannot be separated from the lives of the people working in Ferrari. That is why the working environment and wellbeing of the company’s employees are among our most Many geopolitical experts believe that conflicts may increasingly arise over access to raw materials. For important priorities. this reason, Ferrari places a high priority on responsible sourcing and the integrity of its suppliers. 178 179 ANNUAL REPORT NON-FINANCIAL STATEMENT Our complex in Maranello, a state-of-the-art work environment was designed to reinforce the synergistic relationship between work and results. Our manufacturing facilities are specifically designed with the needs of employees firmly in mind and combines carefully designed lighting systems, green areas (there are numerous trees along the roads and plants within the factory), a new restaurant, and special measures aimed at reducing the environmental impact and noise through the use of advanced technologies. Over the past few years, a significant investment has been made to increase the green areas. These can be found both inside and outside of the various factory buildings, and today cover a surface area of 165,000 square metres. To promote an active lifestyle among our employees, we have launched the “Formula Benessere” program, aimed at providing preventative healthcare to employees and their children. A gym is available for all the employees at Maranello and employees at the Modena plant have free membership in one of the city gyms. Initially provided to the F1 racing team as part of their training program for the Grand Prix activities, the initiative was subsequently rolled out to all employees. As part of the “Formula Benessere” benefits, preventative healthcare is provided to all employees and their children. Medical specialists are available for consultation in areas such as cardiology, osteopathy and dermatology, among others. A free annual check-up focusing on general health and fitness is provided to senior managers and to the children of all employees. Our attention to the promotion of health and safety among our employees goes beyond what is required by law and special workshops are organized for employees to raise awareness on the importance of these topics. Having a healthy working environment is the aim of a series of initiatives within the “Formula Uomo” program. As an example, the Machining Department building is designed to maximize the amount of natural light and, similar to many other facilities, benefits from several internal and external green areas. Its design is aimed at providing the workshops with maximum acoustic comfort thanks to noise reduction solutions (source and reverberation). We have also invested in our own on-site foundry, where we manufacture aluminum alloys as well as parts of engines and bodyworks. Since 2013, the foundry has included a cooling system that makes it air- conditioned and climate controlled. To foster a sense of belonging among employees and their families and to provide them with support during the summer vacation, we have launched the program “Formula Estate Junior”, a free day camp for children of employees aged 3 to 13, with various programs including sports, outdoor activities, excursions and workshops. The program has a duration of 11 weeks (with a shorter 3-day version taking place during Easter holidays) and allows children to enjoy an exciting experience with a didactic purpose: each edition of the “Formula Estate Junior” camp has an educational theme developed by around 80 professional educators and is organized in collaboration with the local community. children’s textbooks (reimbursement is offered to all employees’ children until high school) and, in certain cases, we reimburse the cost of school textbooks for employees in continued education. In 2017, we provided 44 scholarships and, going forward, we aim to offer specific scholarships to help children of employees to study abroad. We offer additional benefits to our employees, including personalised loans at competitive rates in local banks, discounts in various commercial and service outlets and the opportunity to ask questions at the Info point of the Maranello plant. To foster the sense of belonging, the Company organizes multiple events such as the “Natale Bimbi” and the “Family Day”, where we open the gates to the families and friends of all employees. To celebrate our 70th Anniversary, 18,000 people crowded the Maranello and Modena plant complex for the 2017 edition of the Family Day event, which was also attended by Chairman and CEO Sergio Marchionne and Vice-Chairman Piero Ferrari. Some of our most exclusive areas were opened to the visitors especially for the occasion. Family Day also provided a close look at the past and present single-seaters as well as other racing cars. All these benefits are provided to all our employees. Training and talent development Along with the need to hire, develop, and retain talents, we are aware that we must manage human capital as a critical resource to achieve the best possible results. The success, prestige and appeal of our brand depends on the ability to attract talents and retain them. In particular, top drivers, racing management, engineering talent and all the employees that make Ferrari unique have to be rewarded, as they deserve based on their ability, determination, and expectations. This is why we provide career progression opportunities tailored to each individual’s strengths and ambitions, and the company’s own requirements, underpinned by substantial investments in training. A total of over 35,500 hours of training have been delivered right across the company workforce in 2017. Regarding specific training initiatives, in 2009 we started the “Scuola dei mestieri” for training both office staff and operatives with the help of in-house tutors and external instructors, the “Maestri”, who attend dedicated educational programs to learn how to transfer their know-how. We offer an ongoing language training program, covering both professional development and specific interests of employees. Additionally, all training rooms are located within the plant, surrounded by green areas and equipped with noise reduction solutions to foster acoustic comfort. AVERAGE HOURS OF TRAINING 2017 10.51 2016 9.33 Education is also the focus of a series of different initiatives that provide scholarships to exceptional junior high, high school and university students. In 2017, we reimbursed 570 employees for the cost of their Total 180 181 ANNUAL REPORT NON-FINANCIAL STATEMENT Anti-corruption and human rights training is provided in conjunction with our Code of Conduct: all employees are required to complete an online training, and specific educational material is provided to workers. A similar approach has been taken for online trainings on SOX topics and Cyber Security Training Basic Rules. Occupational Health and Safety We are particularly focused on the safety of our people. Recruitment, selection and employee retention At Ferrari, recruitment and selection is about sourcing the right qualities and skills that will represent the backbone of future success and innovation. Our recruitment process provides a platform to engage with future employees, to assess competencies through a structured selection process, and to prepare for post- recruitment integration and development. All employees receive a regular performance and career development review, tailored to their role. Semi-annual formal reviews are carried out for all Senior and Middle managers as well as a relevant portion of Employees, with the results linked to their variable remuneration. Workers are subjected to a different kind of review which envisages regular assessments aimed at developing their internal career path. Ferrari encourages the professional growth of its employees and tries to fill key positions with talented internal candidates before tapping into the external market. To promote responsible behaviour during the assembling phase of cars and engines, we launched many years ago the “Pit Stop” and “Fiorano Race” initiatives, whereby colleagues on the same shift are assigned to “teams”, with key performance indicators in place for occupational health and safety, absenteeism and quality. The teams are then ranked based on this data, with the best performers being rewarded. Furthermore, we organize the “Pole Position Evo” program to evaluate individual performances. During 2017, we implemented a specific online tool to assess and monitor the performance of our employees: roughly 800 employees have already been evaluated using this new system that allows tracking and sharing, with the employees themselves and with management, the results of the assessment, strengths and improvement areas, in addition to the aspiration of the employees and their final evaluation. This online tool will be extended to all employees by 2020, ensuring a transparent process for the performance and career development review process. EMPLOYEES WHO RECEIVED A REGULAR PERFORMANCE AND CAREER DEVELOPMENT REVIEW BY EMPLOYEE CATEGORY IN 2017 Employee category Senior manager Managers and Professionals White Collars Workers Percentage 92% 95% 30% 0% In 2017, an extensive analysis of the key positions covered by our employees has been conducted: the results have been used to develop specific succession plans, with a timeframe of 2-4 years, to ensure the competitiveness of Ferrari over time and to take advantage of our employees’ talent. Ferrari S.p.A., which operates the Maranello and Modena plants, is dedicated to the prevention of accidents at work, with safety in the workplace always a priority. Periodic meetings are held with management to review safety issues, in addition to formal meetings also being held with employee representatives. Periodic internal health and safety audits are performed to ensure compliance with the Ferrari health and safety management system, current laws and best practices. The Maranello and Modena plants, and also the Mugello racing circuit, have obtained the OHSAS 18001 certification. HOURS OF HEALTH AND SAFETY TRAINING PER YEAR AND NUMBER OF PARTECIPANTS Training hours Number of participants 2017 15,386 1,656 2016 14,319 703 2015 4,965 854 There has been a huge investment in safety at work: improvements in the existing structures and specific training have allowed the company to achieve significant results. As shown in the table above, in 2017 the hours of training more than tripled compared to 2015 and in 2017 we also more than doubled the number of participants in the courses. The table below shows the trend in accidents over last three years. As proof of the efficiency of the occupational health and safety system, the Injury Rate is low and constant (0.009), with only 5 occurrences in 2017 (6 in 2016). The Rate represents the frequency of accidents occurred during the working activities in the production plants. The Lost Day Rate, that measures the days of absence for every million hours worked, continues to be low (0.005). Injury rate (2) Lost day rate (3) INJURY AND LOST DAY RATE (1) 2017 0.009 0.005 2016 0.012 0.005 2015 0.012 0.004 (1) The figures provided are referred to all the employees of Ferrari S.p.A., which operate in the plants of Maranello and Modena. (2) The injury rate is the ratio of the number of injuries reported (resulting in more than three days of absence) to the number of hours worked (including overtime), multiplied by 1,000,000, excluding commuting accidents. (3) The lost day rate is the ratio of the number of days of absence due to accidents to the number of hours worked (including overtime), multiplied by 1,000,000, excluding commuting accidents. The most common injuries involved hands and fingers. During the course of 2017, no accidents with fatal consequences have been recorded for employees and external workers in the Maranello and Modena plants. 182 183 ANNUAL REPORT NON-FINANCIAL STATEMENT Our employees in numbers NEW EMPLOYEE HIRES AND EMPLOYEE TURNOVER As of 31st December 2017, the number of our Group(4) employees was 3,380, an increase of 4% compared to 31st December 2016 (3,248). Number of employees Total of which women December 31, 2017 December 31, 2016 3,380 12.3% 3,248 11.5% (1) In this chapter, “Our Group” refers to all the legal entities indicated as consolidated line by line by Ferrari N.V. in 2017 Annual Report. We also rely on external collaborators such as contractors, self-employed persons, workers hired through external agencies and interns. PERCENTAGE OF EMPLOYEES PER EMPLOYEE CATEGORY BY GENDER Employment category Senior Managers Middle Managers and Professionals White Collars Workers Total December 31, 2017 December 31, 2016 Male 93.5% 90.5% 78.6% 92.5% 87.7% Female Total 6.5% 9.5% 21.4% 7.5% 12.3% 92 422 1,109 1,757 3,380 Male 94.5% 91.3% 79.8% 92.6% 88.5% Female Total 5.6% 8.7% 20.2% 7.4% 11.5% 90 392 1,015 1,751 3,248 As indicated in the table above, in the last year the percentage of females in the “Senior Managers” category has increased from 5.6% to 6.5%, females in “Middle Managers and Professionals” positions also increased by around one percentage point. The proportion of women in the other categories has remained relatively constant. PERCENTAGE OF EMPLOYEES BY AGE GROUP Total <30 9.8% 30-50 73.7% >50 16.5% Total 3,380 <30 12.7% 30-50 71.3% >50 16.0% Total 3,248 December 31, 2017 December 31, 2016 The majority of the workforce is between the age of 30 and 50 (73.7%). The percentage of workers under 30 is 9.8%. 94.6% of our employees work in Italy, which is considered the only significant location of operation as this is where our plants and most of our workforce are located. GROUP EMPLOYEE HIRED EMPLOYEE TURNOVER 2017 Total 296 8.8% 2017 Total 150 4.4% Number of employees Turnover % Number of employees Turnover % ABSENTEEISM RATE IN ITALY (5) Workers 2017 2.1% 2016 2.1% 2016 Total 362 11.1% 2016 Total 136 4.2% 2015 2.7% (5) The absenteeism rate is calculated as a ratio of hours lost for sickness divided the number of hours to be worked. The perimeter considered relates only to Ferrari S.p.A. workers. The absenteeism rate for 2017 was in the area of 2% and has been stable over the past few years. Our Environmental Responsibility Our most significant environmental efforts are deployed through efficiencies in the manufacturing processes and a program for the reduction of polluting emissions. The monitoring and management of the environmental performance of our productive plants is assigned to a team that reports to our Chief Technology Officer. Their effort is aimed at minimizing the impact of our activities on the environment, particularly in relation to the energy consumption of production facilities. A different team is in charge of overseeing regulatory developments while monitoring the emissions of Ferrari cars. We assemble all of our cars and manufacture all the engines used in our cars or sold to Maserati at our production facility in Maranello(6) (Italy). The Carrozzeria Scaglietti plant, located in Modena (Italy), is where we manufacture aluminum bodyworks and chassis. The two plants cover a cumulative area of approximately 550,000 m2. We also own the Mugello racing circuit in Scarperia, near Florence (Italy), which covers an area of 1,700,000 m2 (of which 1,200,000 m2 of green or tree-covered areas). (6) Maranello production facility is composed by the main offices and production buildings, the “Nuova Gestione Sportiva” building and the adjacent Fiorano The vast majority of our employees have a permanent contract (98.0%). track (of approximately 3,000 meters). 184 185 ANNUAL REPORT NON-FINANCIAL STATEMENT Additional facilities owned by us include a product development center, a hospitality area and the Ferrari museum in Maranello. We also directly operate 18 retail stores and maintain offices for our foreign subsidiaries and other smaller facilities in Italy, such as the Museo Enzo Ferrari (MEF) in Modena. The environmental impact of these additional facilities is deemed negligible and is excluded in this chapter’s data, however, it will be monitored and considered for inclusion in the next reporting cycles. Our energy consumption mainly relates to the manufacturing of cars and engines. Over the years, our Group has strived to lower its energy consumption and to minimize its environmental impact, adopting innovative solutions and resorting to a trigeneration plant and to the use of renewable energy sources for its manufacturing facilities. ENERGY CONSUMPTION WITHIN THE ORGANIZATION Plants and circuits Environmental management systems We have invested heavily to minimize our environmental impact since 2001, when the company was given the ISO 14001 certification for our plants in Maranello and Modena. In 2016, we obtained the renewal of the certification of our environmental management system according to the new standard ISO 14001:2015. In addition, in 2007, we obtained and renewed the Integrated Environmental Authorisation. In April 2015, Mugello was the first racing circuit in the world to get the “Achievement of Excellence” certificate, which is the top accreditation level within the environmental sustainability program proposed by FIA. The Mugello circuit obtained the certification for the environmental management system with ISO 14001 and the EMAS (Eco-Management and Audit Scheme). Energy efficiency and promotion of alternative energy sources Renewable energy is a priority for us. In 2008, we installed our first solar panels (increased capacity in 2011 and 2015) and from 2009 we started using electricity and hot and cold water generated by the trigeneration plant(7). In 2017, the trigeneration plant produced 86% of the electricity needed for the Maranello plant, while the remaining 14% was generated from renewable sources(8). Our culture embraces energy consumption reduction, constantly implementing actions such as the replacement of traditional illumination systems to LED technology and the use of pumps with inverter technology in the industrial water distribution system. In 2017, we installed a new sand regeneration system which allowed us to achieve an energy saving of 50% compared to the previous technology. In 2016, we also undertook the project of constructing two new buildings: “Nuova Gestione Sportiva” and “New Design Department” that will be completed in the next years. In both cases, the new buildings will be Class A-ranked in order to reduce energy consumption. All new facilities are designed and built to the highest eco-friendly standards. These projects follow the path initiated in 2015, with the inauguration of the Formula 1 team headquarters. Over the years, our Group has rolled out several initiatives to improve the energy efficiency of its plants, such as a new gas furnace fitted for the production of the main engine components in aluminium (cylinder heads, cam covers, crankcases, pumps). Apart from ensuring even higher manufacturing quality, the furnace consumes 70% less energy, while at the same time increasing the smelting capacity to 1,500 kg per hour. Furthermore, thanks to the automation of the loading-unloading procedure, the new installation has significantly increased the level of safety for workers, who are no longer exposed to the line of fire. (7) Even if the trigenerator plant was bought by Ferrari in September 2016, data referring to energ y consumption and emissions consolidate trigenerator plant data for the whole 2016 for comparative reasons. (8) Thanks to a photovoltaic system and purchases of Guarantee of Origin certificates. Unit of measurement: GJ Non-renewable fuel consumption Natural Gas (used for trigenerator) Natural Gas (for other uses) Gasoline (for production process) Diesel (for motor room and other uses) Total electricity bought for consumption Electricity self-produced for consumption(9) Electricity sold (9) From photovoltaic. From renewable sources From non-renewable sources 2017 1,554,134 1,116,343 366,636 69,838 1,316 87,492 81,299 6,192 3,117 11,910 2016 1,578,699 1,146,750 356,658 74,250 1,040 80,963 75,171 5,792 1,612 22,122 Total 1,632,832 1,639,152 The total energy consumption within the Group for 2017 is 1,632,832 GJ, in line with 2016 (1,639,152 GJ), notwithstanding a production increase. Air emissions The emissions of CO2eq deriving from the Maranello and Modena plants and from the Mugello racing circuit (Scope 1 and Scope 2) are equal to 93,327 tCO2eq in 2017 (in line with 93,243 tCO2eq in 2016). DIRECT AND ENERGY INDIRECT GHG EMISSIONS Unit of measurement: tCO2eq Scope 1 (10) Scope 2 (market-based method) (11) Scope 2 (location-based method) 2017 92,528 800 9,795 2016 92,495 748 9,080 (10) Direct greenhouse gas emissions, measured in tons of CO2 equivalent, were calculated using emission factors indicated in “The Greenhouse Gas Protocol: A Corporate Accounting and Reporting Standard (Revised Edition, 2004)”. The data reported refers to emissions of carbon dioxide, methane, nitrous oxide emissions. (11) The data reported in the table includes the purchased electricity and it was calculated in line with the Market-Based Method. In 2017 and 2016, the Group purchased Guarantee of Origin (GO) certificates for Maranello plant in order to avoid the increase of CO2eq emissions in the atmosphere. Indirect greenhouse gas emissions, measured in tons of CO2 equivalent, were calculated using the Residual Mix emission factors declared in 2015 European Residual Mixes, V.1.0, published by AIB in May 2016. GHG Protocol (WRI, WBCSD) definitions 186 187 ANNUAL REPORT NON-FINANCIAL STATEMENT Since 2014 our Group has been purchasing Guarantee of Origin certificates in order to increase the percentage of energy consumed by the Group derived from renewable sources, thus reducing the corresponding CO2 emissions, as determined by the market-based method of calculation. This resulted in 2017 in a reduction of 8,995 tons of CO2eq. Other significant air emissions are related mainly to volatile organic compounds (VOCs) released during vehicle manufacturing. In addition, NOX, SOX and dusts emissions are constantly monitored. 87.3% of VOCs emissions are related to the painting activity (48,848 Kg in 2017). OTHER SIGNIFICANT AIR EMISSIONS(12) Unit of measurement: Kg NOX SOX Volatile Organic Compounds (VOCs) Dusts 2017 69,610 995 55,980 2,432 129,017 2016(13) 74,345 1,504 52,507 5,513 133,869 Total (12) Only air emissions of the plants of Maranello and Modena have been considered. (13) Data regarding 2016 with reference to the trigenerator are estimated based on the last three months of 2016. Furthermore, a new painting process was introduced since 2004 with the aim of reducing VOC emissions. Waste management We acknowledge that rational use of raw materials together with careful waste management helps reducing the environmental impact of the manufacturing process. In addition, innovative solutions and advanced technical processes minimize waste and negative environmental impact. The reuse of production scraps in our manufacturing process(14) also has the objective of reducing waste. To achieve this target, a series of initiatives in the different phases of the manufacturing process have been implemented. As an example, aluminum scraps are melted in the foundry to avoid waste: this is particularly important considering that aluminum is the first raw material used (by weight) in our manufacturing process. Other projects aimed at reducing waste are undergoing a feasibility analysis, in particular, according to the concept of the circular economy, in some cases our production scraps can be used by other business partners in their manufacturing process (e.g. leather scraps, processed sand used in the foundry, aluminum that cannot be smelted). WASTE BY TYPE NON HAZARDOUS WASTE Unit of measurement: tons Total 2017 8,839 2016 7,458.6 (14) Only waste generated in the plants of Maranello and Modena have been considered: waste of Mugello racing circuit have an impact of less than 2% of the total waste produced by our Group. HAZARDOUS WASTE Unit of measurement: tons Total 2017 3,430.2 2016 3,565.9 Total waste for 2017 is equal to 12.269.2 tons. Total waste recovery increased by 1.8% from 41.5% in 2016 to 43.3% in 2017. None of our waste is disposed in landfills. Logistics We produce all of our vehicles and spare parts in our Maranello and Modena plants, in central Italy, however, our network of third party dealers is comprised of 185 point of sales around the world. A meticulous work is constantly carried out to optimize logistical operations with the aim of reducing the impact on the environment and associated air emissions. Water management We are well aware of the importance of a responsible management of water and, even if our plants are not located in areas exposed to high or extremely high overall water risks, nor our production process can be considered water intensive, we have developed a series of initiatives to reduce water consumption in our manufacturing processes, such as cooling systems with water recirculation (e.g. cooling towers). All the water sourced by us comes from municipal water supplies or other utilities and wells: as of today, no water bodies are directly affected by the withdrawal of water. (15) Source: WRI Aqueduct 2014 (World Resources Institute, 2014) WATER WITHRDRAWAL BY SOURCE Unit of measurement: m3 Surface water Wells Municipal water or other water utilities Total 2017 0 524,428 227,138 751,566 2016 0 436,348 152,124 588,472 We treat our wastewater in accordance with all applicable laws and regulations. All the wastewater of our plants is always monitored and channelled not directly into water bodies but in the public sewage system. The water used in some of the industrial processes (such as washing solutions or paint washing), before its discharge in the public sewer system, is treated by an industrial water treatment plant where it undergoes the necessary chemical, physical, and biological treatment. 188 189 ANNUAL REPORT NON-FINANCIAL STATEMENT WATER DISCHARGE BY DESTINATION The expertise acquired in these fields has recently guided our efforts to combine improved performance Unit of measurement: m3 Effluents / Water bodies Public sewer system 2017 0 378,895 378,895 2016 0 316,732 316,732 Total Biodiversity and noise pollution Ferrari plants and Mugello racing circuit, as of December 2017, are not located in any protected or highly biodiverse areas and, to our best knowledge, they do not have significant environmental impacts on such areas. Moreover, our plants and circuit are not adjacent(16) to any protected or highly biodiverse areas. This analysis is conducted annually and is based on the World Database on Protected Areas(17). Vehicles environmental impact Part of the environmental impact of our activities is related to our product lifecycle. Ferrari cars are perceived as collectibles and therefore the number of cars demolished each year is very scarce. In addition, the cars are generally not considered means of transportation. Vehicles emissions We are subject to a variety of laws and regulations that, among others, are related to car emissions and fuel consumption. Ferrari vehicles must comply with extensive regional, national and local laws and regulations, as well as industry self-regulations (including those that regulate vehicle safety). However, we currently benefit from certain regulatory exemptions because we qualify as a Small Volume Manufacturer or similar designation in most of the jurisdictions where we sell our cars (for more details refer to the “Regulatory Matters” paragraph of 2017 Annual Report). In 2012, we achieved a 27% reduction in CO2 emissions (compared to 2007) for our European fleet through improvements in energy efficiency by increasing the energy produced for the same level of input and therefore reducing the cars’ energy requirements. Following the achievement of this result, we continued focusing on researching technologies that further reduced emissions and, in early 2013, introduced LaFerrari, the first of our cars to use hybrid technology. Through innovations in areas such as turbochargers, engine downsizing, transmission, electric steering and hybrid technologies, we continue to target further reductions in CO2 emissions and have set a target to reduce by 2020 CO2 emission by 15% (compared to 2014) on our entire fleet. Consistent with our mission to develop cutting edge sports and GT cars, product development efforts continually focus on improving core components, such as the powertrain, car dynamics, and the use of materials such as special aluminum alloys and carbon fiber. (16) For this analysis, a distance of 3 km or less has been considered as “adjacent”. (17) The database considered for the analysis is managed by the United Nations Environment World Conservation Monitoring Centre (UNEP-WCMC) with support from IUCN and its World Commission on Protected Areas. with reductions in CO2 emissions. We are undertaking an important program to understand the potential of hybrid technology and are researching how to improve the performance and driving experience of our cars without losing fuel efficiency advantages. We are now working hard on the integration of hybrid technology more broadly into our car portfolio. AVERAGE SPECIFIC CO2 EMISSIONS (EU FLEET)(18) (18) For the purpose of this graph, 100% of the Ferrari fleet in EU has been taken into account to determine the average specific emissions of CO2, despite the phase-in criteria granted in the years 2010-2014. 2017: provisional fleet average emissions of CO2. Vehicles’ end of life We are not directly involved in product take back programs due to the nature of our business: the number of Ferrari cars demolished each year is very scarce as Ferrari cars are perceived as collectibles, which the Group also supports through its “Ferrari Classiche” services, and the active preowned market. Ferrari contributes towards the community Community engagement and involvement with the local territory are of fundamental importance for the Group. All Ferrari cars are manufactured in our production facilities in Maranello and Modena, in the heart of the Italian “Motor Valley”: we are aware of our responsibility towards the community and our efforts are directed to support the development of the local community mainly through collaborations with local universities and thanks to the industry network in the Emilia-Romagna region. To keep alive the spirit of Ferrari and the story of its founder Enzo Ferrari, two different museums have been established. 190 191 164 ANNUAL REPORT NON-FINANCIAL STATEMENT Ferrari & universities We believe that promoting the education of young talents is an essential step to reinforce the connection with local communities. Shaping brilliant engineers with a specific academic background that focuses on new technologies within the automotive industry, and in particular innovative solutions for state-of-the-art performance in luxury cars, is also a prerequisite for the Group to seize future opportunities. The Motorvehicle University of Emilia-Romagna (MUNER) is an association which was strongly advocated by the Emilia-Romagna region. It was created thanks to a synergetic connection among the universities of Modena and Reggio Emilia, Bologna, Ferrara and Parma along with car companies in the region that represent the excellence of Italian brands, which of course includes Ferrari. Ferrari Museum Maranello & Museo Enzo Ferrari (MEF) The Ferrari Museum Maranello invites visitors to experience the Prancing Horse dream first-hand, offering visitors a journey through the Group’s history, values and automotive world. The Museo Enzo Ferrari is built around the house in which Enzo Ferrari was born in 1898. The MEF tells the story of Enzo Ferrari as a young boy discovering the irresistible allure of the world of motor racing, his career as a driver in 1920s, as the driving force behind the Scuderia Ferrari in the 1930s, and then as Ferrari, the Constructor, from 1947 onwards. Methodology and scope Through our Non-Financial Statement, we aim to provide our stakeholders with non-financial information, illustrate our sustainability strategy and our corporate social responsibility initiatives in 2017 (from January 1st, 2017 to December 31st, 2017) to ensure transparent and structured communication with our stakeholders. This Statement was prepared in accordance with the Dutch Civil Code, and with the Dutch Decree on Non-Financial Information (Besluit bekendmaking niet-financiële informatie), which is a transposition of Directive 2014/95/EU ‘Disclosure of non-financial and diversity information’ into Dutch law. This Statement is an extract of our Sustainability Report, that is prepared in compliance with the “GRI Sustainability Reporting Standards” (2016) issued by the Global Reporting Initiative (GRI). This has been shared with the Executive Officers of the Group and approved by the Governance and Sustainability Committee of the Board of Directors. With regard to the financial data, the scope of reporting corresponds to that of Ferrari N.V.’s consolidated financial statement. Regarding the qualitative and quantitative data on social and environmental aspects, the scope of reporting corresponds to Ferrari N.V. and our subsidiaries consolidated on a line-by-line basis (as indicated in the section 3 “Scope of consolidation” of 2017 Annual Report). Any exceptions, with regard to the scope of this data, are clearly indicated throughout the Statement. Directly measurable quantities have been included, while limiting, as far as possible, the use of estimates. Any estimated data is indicated accordingly, additionally certain totals in the tables included in this document may not add due to rounding. During the reporting period, we did not face any significant change concerning the organization’s size, structure, ownership or supply chain. RISKS, RISK MANAGEMENT AND CONTROL SYSTEMS Our risk management approach is an important business driver and it is integral to the achievement of the Group’s long-term business plan. We take an integrated approach to risk management, where risk and opportunity assessment are at the core of the leadership team agenda. The Board of Directors is responsible for considering the ability to control strategic, operational, compliance, financial and reporting risks crucial to achieving its identified business targets, and for the continuity of the Group. For this reason, Ferrari has developed varying appetites to achieve different strategic objectives, focusing attention at all relevant risk levels, from risk management to internal control. Ferrari has adopted the COSO Framework (Committee of Sponsoring Organizations of the Treadway Commission Report - Enterprise Risk Management Model) as the foundation of its risk management framework. The Group Executive Council (“GEC”), which is supported by senior management, is responsible for identifying, prioritizing and mitigating risks and for the establishment and maintenance of a risk management system across our business functions. As the decision making body led by the CEO and composed of the heads of the operating segments and certain central functions, the GEC reviews the risk management framework and the Company’s key global risks on a regular basis. For those risks deemed to be significant, comprehensive mitigating action plans are developed and reviewed on a regular basis to ensure the action plans are relevant and sufficient. At least annually, our risk management framework and risks are discussed with the Group’s Audit Committee. Risk Appetite The risk appetite of Ferrari, (i.e. the level of risk that Ferrari is willing to accept to achieve its objectives), has been defined based on the parameters identified below and will be applied to our strategy, Code of Conduct, company values and policies. Ferrari does not rank by importance the individual risks identified in this section because it believes such ranking would be an arbitrary exercise as all risks mentioned have relevance for the Group and the business. The type of risks identified are as follows: Risk category Risk description Risk appetite Strategic risks (S) Operational risks (O) Compliance risks (C) Financial risks (F) Financial reporting risks (FR) Key Risks and Risk Trends Risks which affect or are created by Ferrari’s business strategy and could affect Ferrari’s long-term positioning and performance. Risk which affect Ferrari’s ability to execute its business plan. Risks of non-compliance with laws, regulations, local standards, code of conduct, internal policies and procedures. Risks include areas such as valuation, currency, liquidity and impairment risks. Risks primarily relate to internal controls. Moderate Low - moderate Zero tolerance Low Zero tolerance Ferrari assesses risks according to their potential impact and the Company’s vulnerability (including the related mitigating actions). The risk impact could result in a material direct or indirect adverse effect on Ferrari’s business, operations, volumes, financial condition and performance, reputation and/or other 192 193 ANNUAL REPORT RISKS, RISK MANAGEMENT AND CONTROL SYSTEMS interests. Below we identify and discuss our key Company-specific risks. The risks listed and the response plans are not exhaustive and may be adjusted from time to time. Ferrari expects that the controls which have been implemented will mitigate the risks up to the level of the risk appetite. Brand Image (S) The preservation and enhancement of the value of the Ferrari brand is crucial in driving demand for our cars and our revenues. The perception and recognition of the Ferrari brand are of strategic importance and depend on many factors such as the design, technology, performance, quality and image of our cars, the appeal of our dealerships and stores, the success of our client activities, as well as our general profile, including our brand’s image of exclusivity. The prestige, identity and appeal of the Ferrari brand also depend on the continued success of the Scuderia Ferrari racing team in the Formula 1 World Championship. Key aspects Response plans: Preserving brand value Selective licensees of the Ferrari brand Success of the Formula 1 team Monitor and maximize residual values of Ferrari cars Selective franchising partners Dealer score card Ferrari Academy COMPETITION (S) We face competition in all product categories and markets in which we operate. We compete with other international luxury performance car manufacturers which own and operate well-known brands of high- quality cars, some of them are part of larger automotive groups and may have greater financial resources and bargaining power with suppliers, particularly in light of our policy to maintain low volumes in order to preserve and enhance the exclusivity of our cars. We believe that we compete primarily thanks to our brand image, the performance and design of our cars, our reputation for quality and the driving experience for our customers. Several global luxury automotive manufacturers have increased competitive pressure for luxury cars particularly in EMEA and the United States. Considering that these are mature markets, we anticipate that existing market participants will try to aggressively protect or increase their market share. Increased competition may result in pricing pressure, reduction of marginality and our inability to meet our shipment targets, which could have a material adverse effect on our results of operations and financial condition. Key aspects Margin pressure Shipments Response plans: Financing of pre-owned to keep residual values high Focus on client relationships, including Maranello Experience, selected participation for new model launches and Ferrari clubs Close contact with dealers and clients programs Personalization services (Atelier and Tailor Made) Unfavorable global economic conditions (S) Deteriorating general economic conditions may affect disposable incomes and reduce consumer wealth, which in turn may impact client demand, particularly for luxury goods, which may negatively impact our profitability and put downward pressure on our prices and volumes. Furthermore, during recessionary periods, social acceptability of luxury purchases may decrease and higher taxes may be more likely to be imposed on certain luxury goods including our cars. Dependence on manufacturing facilities in Maranello and Modena and relationship with single source suppliers (O) All cars sold and assembled by us and all engines we use for our cars or we sell to Maserati are manufactured at our production facility in Maranello, Italy, where we also have our corporate headquarters and Formula 1 activities. We manufacture all our car chassis in a nearby facility in Modena, Italy. In general, although our sales have historically been comparatively resilient in periods of economic turmoil, sales of luxury goods tend to decline during recessionary periods when the level of disposable income tends to be lower or when consumer confidence is low. In the event that we are unable to continue production at either of these two facilities, we would need to seek alternative manufacturing arrangements which would take time and reduce our ability to produce sufficient cars to meet demand. Key aspects Response plans: Dependency on mature economies, particularly in EMEA and the United States Expanding in emerging markets, diversifying and monitoring economic trends; developing growth plans in line with growth of High Net Worth Individuals and Ultra High Net Worth Individuals. Global economic developments Closely monitoring all market developments and continuously reviewing the countries in which we do business and their geo-political events Monitoring budget and timing of capital expenditures Monitoring backlog orders Our Maranello or Modena plants could become unavailable either permanently or temporarily for a number of reasons, including contamination, power shortage or labor unrest. In addition, Maranello and Modena are located in the Emilia-Romagna region of Italy, which has the potential for seismic activity. If major disasters such as earthquakes, fires, floods, hurricanes, wars, terrorist attacks, pandemics or other events occur, our headquarters, Formula 1 activities and production facilities may be seriously damaged, or we may have to stop or delay the production and shipment of our cars. Our business depends on a significant number of suppliers that provide raw materials, parts and systems we require to manufacture cars and parts to run our business. We source materials from a limited number of suppliers. In addition, similar to other small volume car manufacturers, most of the key components we use in our cars are purchased from single source suppliers. 194 195 ANNUAL REPORT RISKS, RISK MANAGEMENT AND CONTROL SYSTEMS Key aspects Response plans: Dependence on two manufacturing facilities located in close proximity to each other Design of business continuity plan Single source suppliers for components Disaster recovery plan for IT systems Dependence on limited number of suppliers for raw materials Investments in the last 15 years to reduce the effect of possible damage from earthquakes Insurance coverage requirements could significantly affect our product development plans and may limit the number and types of cars we sell and where we sell them, which may adversely affect our revenue and operating results. Our compliance controls, policies, and procedures may not protect us in every instance from acts committed by our employees, agents, contractors or collaborators that would violate the laws or regulations of the jurisdictions in which we operate, including employment, foreign corrupt practices, environmental, competition, and other laws and regulations. In particular, our business activities may be subject to anticorruption laws, regulations or rules of other countries in which we operate. If we fail to comply with any of these regulations, it could adversely impact our operating results, financial condition and reputation. High quality reputable suppliers assessed through the “Supplier Risk Committee” Key aspects Response plans: Attraction, development and retention of talents (O) Our success depends on the ability of our senior executives and other members of management to effectively manage individual areas of our business and our business as a whole. In particular, our management team benefits from the leadership of our CEO and Chairman. The prestige, identity, and appeal of the Ferrari brand depend on the continued success of the Scuderia Ferrari racing team in the Formula 1 World Championship, which depends on our ability to attract and retain top drivers, racing management and engineering talent. If we are unable to attract, retain and incentivize senior executives, drivers, team managers and key employees to succeed in international competitions or devote the capital necessary to fund successful racing activities, new models and innovative technology, this may adversely affect potential clients’ enthusiasm for the Ferrari brand and their perception of our cars, which could have an adverse effect on our business, results of operations and financial condition. Key aspects Response plans: Requirement for skilled engineers Preparing current successful employees for future key positions Requirement to attract and retain the best drivers Improving talent development program for key resources Management potential Labor unions Succession plan Retention plan Training Non-compliance with laws, regulations, local standards (including tax) and codes (C) We are subject to comprehensive and constantly evolving laws, regulations and policies throughout the world. We expect the legal and regulatory requirements affecting our business and our costs of compliance to keep increasing significantly in scope and complexity in the future. In Europe and the United States, for example, significant governmental regulation is driven by environmental, fuel economy, vehicle safety and noise emission concerns and regulatory enforcement has become more active in recent years. Evolving regulatory Requirement to be compliant with changes in Formula 1 regulations and ability to adapt on a timely Continuous monitoring of changes in the Formula 1 regulations and identification of early remediation plans Participation in Formula 1 Strategic Group HSE (Health, Safety and Environment) Increasing knowledge and awareness of laws, regulations, standards and codes Tax Human Resources Legal Anti-Bribery & Corruption Code of Conduct Export - Import Monitoring, reviewing, reporting and adapting to relevant changes in rules and regulations Strengthening IT infrastructure for standard operational procedures and guidance Implement and update global HSE system Risk-based reviews of operations by HSE professionals Increasing internal compliance awareness and effective communication between central compliance team and managers working in the subsidiaries Communicating and implementing business conduct standards internally Maintaining a global whistle blower procedure Developing key procedures and policies for all relevant financial and business areas Exchange rate fluctuations, interest rate changes, credit risk and other market risks (F) Ferrari operates in numerous markets worldwide and is exposed to market risks stemming from fluctuations in currency and interest rates. The exposure to currency risk is mainly linked to our cash flows from sales which are denominated in currencies different from those connected to purchases or production activities. We incur a large portion of our capital and operating expenses in Euros while we receive the majority of our revenues in currencies other than Euro. In addition, foreign exchange movements might also negatively affect the relative purchasing power of our clients which could also have an adverse effect on our results of operations. The main foreign currency exchange rate to which Ferrari is exposed is the Euro/U.S. Dollar for sales in U.S. Dollars in the United States and other markets where the U.S. Dollar is the reference currency. In 2017, the 196 197 ANNUAL REPORT RISKS, RISK MANAGEMENT AND CONTROL SYSTEMS value of commercial activity exposed to changes in the Euro/U.S. Dollar exchange rate accounted for about 62 percent of the total currency risk from commercial activity. It is the Group’s policy to use derivative financial instruments to hedge between 50 and 90 percent of certain exposures subject to foreign currency exchange risk for up to twelve months. Several subsidiaries are located in countries that are outside the Eurozone exposing Ferrari to conversion exchange risk, in particular the United States, the United Kingdom, Switzerland, China, Hong Kong, Japan, Australia and Singapore. The Group monitors its principal exposure to conversion exchange risk, although there was no specific hedging in this respect at the reporting date. Ferrari always had exceptionally high solvency rates. The company did not use any long-term credit lines and boasted favorable liquidity positions and bank facilities that accommodate the day-to-day management of the working capital. Approximately 32 percent of the Group’s total debt bears floating rates of interest. Ferrari enters into interest rate caps as requested by certain of its securitization agreements which bear floating rates of interest. Considering the current economic environment, Ferrari has not entered into any other interest rate derivatives, however, the exposure is continually monitored. Ferrari’s most important financial assets are its financial services portfolios secured on the titles of cars or other guarantees, spread over more than 3,300 clients that are mainly in the US. Impairment risk mainly relates to the financial services portfolio which is evaluated on an individual basis for material credit positions. The amount of the write-down is based on an estimate of the recoverable cash flows, their timing, recovery costs and the fair value of any guarantees received. Further information is included in Note 31 to the Consolidated Financial Statements. Key aspects Response plans: Exposure to foreign exchange movements from non-Euro related sales Exposure to interest rate movements on financial assets and liabilities Foreign exchange hedging instruments in line with the Company’s risk management policy Monitoring interest rate movements for hedging purposes Credit risk of default or insolvency Credit approval policies applied to dealers and retail clients Personal guarantees and security of the vehicle Financial Reporting (FR) Starting from October 2015 Ferrari N.V. is listed at the New York Stock Exchange (NYSE), while from January 2016 Ferrari N.V. is also listed on the Italian Stock Exchange (Mercato Telematico Azionario - MTA). Listing in regulated markets involves being compliant with the related local and specific regulations. In particular, publicly traded companies filing financial statements with the US Securities and Exchange Commission are required to comply with the Sarbanes Oxley Act requirements, in particular sections 302, 404 and 906 that involve a periodical management assessment of internal controls and CEO and CFO Certifications of Periodic Financial Reports and SEC Filings (in addition, our independent registered public accounting firm is also required to report on the effectiveness of the internal control over financial reporting). Under the COSO Internal Control-Integrated Framework, according to which the internal control system is defined as a set of rules, procedures and tools designed to provide reasonable assurance of the achievement of corporate objectives, Ferrari has developed an Internal Control System over the Financial Reporting in order to assure completeness, accuracy and reliability of the group financial reporting. Within the abovementioned context, identification and evaluation of the risk of misstatements which could have material effects on financial reporting is carried out through a risk assessment process that uses a top-down approach to identify the organizational entities, processes and the related accounts, in addition to specific activities that could potentially generate significant errors. Under the methodology adopted by the Company, risks and related controls are associated with the accounting and business processes upon which accounting information is based. Significant risks identified through the assessment process require definition and evaluation of key controls that address those risks, thereby mitigating the possibility that financial reporting will contain any material misstatements. In accordance with international best practices, the Group has two principal types of control in place: • controls that operate at Group or subsidiary level, such as delegation of authorities and responsibilities, separation of duties, and assignment of access rights to IT systems; and • controls that operate at process level, such as authorizations, reconciliations, verification of consistencies, etc. This category includes controls for operating processes, controls for financial closing processes and controls carried out by specific service providers. These controls can be preventive (i.e., designed to prevent errors or fraud that could result in misstatements in financial reporting) or detective (i.e., designed to reveal errors or fraud that have already occurred). These controls may also be classified as manual or automatic, such as application-based controls relating to the technical characteristics and configuration of IT systems supporting business activities. An assessment of the design and operating effectiveness of key controls is carried out through tests performed periodically during the year, both at Group and subsidiary level, using sampling techniques recognized as best practices internationally. The assessment of the controls may require the definition of compensating controls and plans for remediation and improvement. The results of monitoring are subject to periodic review by the manager responsible for the Company’s financial reporting and communicated by him to senior management and to the Audit Committee. During 2017, in addition to the current activities of specific committees (e.g. financial reporting committee, disclosure committee, internal control committee) already created in the past, many others have been carried out in order to improve our group internal control system over the financial reporting and to strengthen the awareness over compliance, including: • • introduction of new/updated policies and procedures; implementation of new IT systems, mainly with reference to the sales process; • update the SOX 404 compliance program, including setting and testing of operating controls; and • organization of training sessions on security and compliance matters. 198 199 ANNUAL REPORT REMUNERATION OF DIRECTORS Introduction This description below summarizes the remuneration policy applicable to the executive and non- executive directors of the Company and the remuneration paid to these individuals for the year ended on December 31, 2017. The form and amount of compensation received by the directors of Ferrari for the year ended on December 31, 2017 was determined in accordance with the remuneration policy. The Company may from time to time amend the remuneration policy subject to Shareholders’ approval when necessary. Remuneration Policy for Executive Directors The Board of Directors determines the compensation for our executive directors at the recommendation of the Compensation Committee and with reference to the remuneration policy. The remuneration policy is approved by our shareholders and is published on our corporate website www.ferrari.com. The objective of the remuneration policy is to provide a compensation structure that allows us to attract and retain the most highly qualified executive talent and by motivating such executives to achieve business and financial goals that create long-term value for shareholders in a manner consistent with our core business and leadership values. The policy is aligned with Dutch law and the Dutch Corporate Governance Code. Features of the remuneration for executive directors The remuneration policy aims to provide total compensation that: • • • • attracts, retains and motivates qualified executives; is competitive as compared to the compensation paid by comparable companies; reinforces our performance driven culture and meritocracy; and is aligned to shareholders interests. The compensation structure for executive directors includes a fixed component and a variable component based on short and long-term performance. We believe that this compensation structure promotes the interests of Ferrari in the short and the long-term and is designed to encourage the executive directors to act in the best interests of Ferrari. In determining the level and structure of the compensation of the executive directors, the non-executive directors will take into account, among other things, Ferrari’s financial and operational results and other business objectives. We establish target compensation levels using a market- based approach and we periodically benchmark our executive compensation program against peer companies and monitor compensation levels and trends in the market. Remuneration elements On the basis of the remuneration policy objectives, compensation of executive directors consists, inter alia, of the following elements discussed below. We note that only the long-term incentives element was applicable in 2017. Fixed component The primary objective of the base salary (the fixed part of the annual cash compensation) for executive directors is to attract and retain highly qualified senior executives. Our policy is to periodically benchmark comparable salaries paid to executives with similar experience by comparable companies. Variable components Executive directors are also eligible to receive variable compensation subject to the achievement of pre-established financial and other identified performance targets. The short and long-term components of executive directors’ variable remuneration are linked to predetermined, assessable targets and add to long- term shareholder creation. Short-term incentives The primary objective of performance based short-term variable cash based incentives is to incentivize the executive directors to focus on the business priorities for the current or next year. The executive directors’ variable remuneration is linked to the achievement of short-term (i.e. annual) financial and other identified objectives proposed by the Compensation Committee and approved by the non-executive directors each year. To determine the executive directors’ annual performance bonus, the Compensation Committee and the non-executive directors: • approve the executive directors’ targets and maximum allowable bonuses; • select the appropriate metrics and their weighting; • set the stretch objectives; • consider any unusual items in a performance year to determine the appropriate measurement of achievement; and • approve the final bonus determination. In addition, upon proposal of the Compensation Committee, the non-executive directors have authority to grant periodic bonuses for specific transactions that are deemed exceptional in terms of strategic importance and effect on Ferrari’s results. The form of any such bonus (cash, common shares of Ferrari or options to purchase common shares) is determined by the non-executive directors from time to time. Long term-incentives Following the approval of the equity incentive plan by the Board of Directors, upon the recommendation of the Compensation Committee, on March 1, 2017, on April 14, 2017 the Shareholders approved an award to the Chief Executive Officer under the Company’s equity incentive plan. In particular, 450 thousand performance share units (“PSUs”) have been awarded to the Chief Executive Officer. The grants of the PSUs, which each 200 201 ANNUAL REPORT REMUNERATION OF DIRECTORS represent the right to receive one common share of the Company, cover a five-year performance period from 2016 to 2020, consistent with the Company’s strategic horizon. Other benefits We believe that the equity incentive plan increases the alignment between the Company’s performance and shareholder interests, by linking the compensation opportunity of the Chief Executive Officer of the Company to increasing shareholder value. The PSUs vest in three equal tranches in March 2019, 2020 and 2021, subject to the achievement of a market performance condition related to Total Shareholder Return (“TSR”). The interim partial vesting periods are independent of one another and any under-achievement in one period can be offset by over-achievement in subsequent periods. The target amount of PSUs vest as follows based on the Company’s TSR ranking compared to an industry specific peer group of eight, including the Company, (“Peer Group”): Executive directors may also be entitled to customary fringe benefits such as personal use of aircraft, company car and driver, personal/home security, medical insurance, accident insurance, tax preparation and financial counseling. The Compensation Committee may grant other benefits to the executive directors in particular circumstances. Internal pay ratios The Company is not disclosing pay ratios for 2017 compensation, as the Dutch Corporate Governance Code does not describe the methodology to determine and disclose such ratios. The Company will continue to monitor the new and still evolving guidance under the Dutch Corporate Governance Code. Ferrari TSR Ranking % of Target Awards that Vest Remuneration Policy for Non-Executive Directors 1 2 3 4 5 150% 120% 100% 75% 50% The defined Peer Group is as follows: Remuneration of non-executive directors is approved by the Company’s shareholders and periodically reviewed by the Compensation Committee. Remuneration of non-executive directors is fixed and not dependent on the Company’s financial results. Non-executive directors are not eligible for variable compensation and do not participate in any incentive plans. The current annual remuneration for the non-executive directors (which was approved at the Annual General Meeting of Shareholders’ of the Company, held on April 14, 2017) is: Hermes LVMH Burberry Moncler Brunello Cucinelli Richemont Ferragamo • $75,000 for each non-executive director. The total number of shares that will eventually be issued upon vesting of the PSUs may vary from the original award of 450 thousand, depending on the level of TSR performance achieved compared to the Peer Group. The performance period for the PSUs commenced on January 1, 2016. The fair value of the awards used for accounting purposes was measured at the grant date using a Monte Carlo Simulation model. The range of the fair value of the PSUs that were awarded is €68.18-€72.06 per share. The key assumptions utilized to calculate the grant-date fair values for these awards are summarized below: Key Assumptions Grant date share price Expected volatility Dividend yield Risk-free rate €66.85 17.4% 1.2% 0% • An additional $10,000 for each member of the Audit Committee and $20,000 for the Audit Committee Chairman. • An additional $5,000 for each member of the Compensation Committee and the Governance and Sustainability Committee and $15,000 for the Compensation Committee Chairman and the Governance and Sustainability Committee Chairman. • An additional $25,000 for the lead non-executive director. All remuneration of the non-executive directors will be paid in cash. The Board of Directors will determine stock ownership guidelines applicable to directors and employees. The Compensation Committee has been considering options for determining formal stock ownership guidelines that will apply in connection with the first vesting opportunity under the Company’s equity incentive plan in 2019. Directors’ Compensation The expected volatility was based on the observed volatility of the Peer Group. The risk-free rate was based on the iBoxx sovereign Eurozone yield. The following table summarizes the remuneration received by the members of the Board of Directors for the year ended December 31, 2017 from Ferrari and its subsidiaries. 202 203 ANNUAL REPORT REMUNERATION OF DIRECTORS Name Office held In office from/to Annual fee (€) Other compensation (€) Total — 115,317 — — Sergio Marchionne(1) Chairman, Chief Executive Officer and Executive Director 01/01/17-12/31/17 — John Elkann Piero Ferrari Vice Chairman and Non-Executive Director Vice Chairman and Non-Executive Director 01/01/17-12/31/17 115,317 01/01/17-12/31/17 102,039 9,880(2) 111,919 Delphine Arnault Non-Executive Director 01/01/17-12/31/17 Louis C. Camilleri Senior Non-Executive Director 01/01/17-12/31/17 Giuseppina Capaldo Non-Executive Director 01/01/17-12/31/17 Eddy Cue Sergio Duca Lapo Elkann Non-Executive Director 01/01/17-12/31/17 Non-Executive Director 01/01/17-12/31/17 Non-Executive Director 01/01/17-12/31/17 Amedeo Felisa(3) Non-Executive Director 01/01/17-12/31/17 Maria Patrizia Grieco Non-Executive Director 01/01/17-12/31/17 Adam Keswick Elena Zambon Non-Executive Director 01/01/17-12/31/17 Non-Executive Director 01/01/17-12/31/17 97,614 133,021 106,465 102,039 119,743 97,614 47,655 106,465 97,614 102,039 — — — — — — 40,000(3) — — — 97,614 133,021 106,465 102,039 119,743 97,614 87,655 106,465 97,614 102,039 (1) No fixed compensation was paid by Ferrari or any of its subsidiaries to Mr. Marchionne in his capacity as Chairman or Chief Executive Officer for the year ended December 31, 2017. (2) Relates to a car benefit provided to the Vice-Chairman in accordance with the Remuneration policy of the Company. (3) Mr. Felisa served on the Board of Directors as Executive Director with a specific consultancy contract until the Annual General Meeting of Shareholders held on April 14, 2017, following which Mr Felisa served as Non-Executive Director. Share-Based Compensation of Executive Directors The following table gives an overview of the share plans held by the Chief Executive Officer. Name Grant Date Vesting Date Fair Value on Grant Date Awards Granted Awards Vested Sergio Marchionne April 14, 2017 2019 / 2020 / 2021 €68.18 - €72.06 450,000 — The above awards relate to 450 thousand PSUs awarded to the CEO under the equity incentive plan, which covers a five-year performance period from 2016 to 2020, consistent with the Company’s strategic horizon. The PSU awards vest in three equal tranches in March 2019, 2020 and 2021, subject to the achievement of a market performance condition related to Total Shareholder Return. At December 31, 2017 none of the PSU awards had vested. The total cost recognized in 2017 for the performance period 2016 and 2017 amounted to approximately €16.5 million. For further details please see Note 22 “Share-Based Compensation” to the Consolidated Financial Statements. Compensation of the members of the GEC The compensation paid to or accrued during the year ended December 31, 2017 by Ferrari and its subsidiaries to the members of the GEC (excluding the CEO) amounted to €16.0 million in aggregate, including €4.7 million for share-based compensation in relation to PSUs and RSUs awarded to key management under the equity incentive plan for the performance period covering 2016 and 2017. The PSU and RSU awards vest in three equal tranches in March 2019, 2020 and 2021, subject to the achievement of a market performance condition related to Total Shareholder Return, therefore at December 31, 2017 none of the PSU or RSU awards had vested. For further details please see Note 22 “Share-Based Compensation” to the Consolidated Financial Statements. Director and Officer Overlaps There are overlaps among the directors and officers of FCA and our directors and officers. These individuals owe duties both to us and to the other companies that they serve as officers and/or directors. This may raise certain conflicts of interest as, for example, these individuals review opportunities that may be appropriate or suitable for both Ferrari and such other companies, or business transactions are pursued in which both Ferrari and such other companies have an interest, such as Ferrari’s arrangement to supply engines for Maserati cars. For example, Mr. Marchionne is also the Chief Executive Officer of FCA, and certain of our other directors and officers may also be directors or officers of FCA or Exor, including Mr. John Elkann, who is our Vice Chairman, the Chairman of FCA and the Chairman and Chief Executive Officer of Exor. Exor holds approximately 23.5 percent of our outstanding common shares and approximately 33.4 percent of the voting power in the Company, while it holds approximately 29.2 percent of the outstanding common shares and 43.1 percent of the voting power in FCA. See “Risk Factors-Risks related to our Common Shares-We may have potential conflicts of interest with FCA and Exor and its related companies.” 204 205 ANNUAL REPORT FERRARI RACING ACTIVITIES SF70H SF70H Sebastian Vettel Kimi Räikkönen Sebastian Vettel Kimi Räikkönen World Endurance Championship GT Manufacturers’ World Champions James Calado and Alessandro Pier Guidi GT Drivers’ World Champions 206 IMSA GTD Teams’ and Drivers’ Champions ELMS GTE Teams’ and Drivers’ Champions 207 ANNUAL REPORTFERRARI RACING ACTIVITIES  SF70H 208 209 FERRARI RACING ACTIVITIES  SF70H 210 211 FERRARI RACING ACTIVITIES  Sebastian Vettel 212  Kimi Räikkönen 213 FERRARI RACING ACTIVITIES Kimi Räikkönen  Sebastian Vettel 214  Kimi Räikkönen 215 FERRARI RACING ACTIVITIES  World Endurance Championship - GT Manufacturers’ World Champions 216 217 FERRARI RACING ACTIVITIES  James Calado and Alessandro Pier Guidi - GT Drivers’ World Champions 218 219 FERRARI RACING ACTIVITIES  IMSA GTD Teams’ and Drivers’ Champions 220 221 FERRARI RACING ACTIVITIES  ELMS GTE Teams’ and Drivers’ Champions 222 223 Ferrari N.V. Ferrari N.V. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Consolidated Income Statement Consolidated Statement Of Comprehensive Income Consolidated Statement Of Financial Position Consolidated Statement Of Cash Flows Consolidated Statements Of Changes In Equity Notes To The Consolidated Financial Statements 225 226 227 228 229 230 CONSOLIDATED INCOME STATEMENT for the years ended December 31, 2017, 2016 and 2015 Net revenues Cost of sales Selling, general and administrative costs Research and development costs Other expenses, net Result from investments EBIT Net financial expenses Profit before taxes Income tax expense Net profit Net profit attributable to: Owners of the parent Non-controlling interests Basic earnings per common share (in €) Diluted earnings per common share (in €) For the years ended December 31, Note 2017 2016 2015 (€ thousand) 3,416,890 3,105,084 2,854,369 1,650,860 1,579,690 1,498,806 329,065 657,119 6,867 2,437 295,242 613,635 24,501 3,066 338,626 561,582 11,035 — 775,416 595,082 444,320 29,260 27,729 10,151 746,156 567,353 434,169 208,760 167,635 144,115 537,396 399,718 290,054 535,393 398,762 287,816 2,003 2.83 2.82 956 2.11 2.11 2,238 1.52 1.52 4 5 6 7 8 9 10 11 3 13 13 224 225 The accompanying notes are an integral part of the Consolidated Financial Statements. FINANCIAL STATEMENTS FINANCIAL STATEMENTS Ferrari N.V. CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME for the years ended December 31, 2017, 2016 and 2015 Net profit Items that will not be reclassified to the consolidated income statement in subsequent periods: (Losses)/Gains on remeasurement of defined benefit plans Related tax impact Total items that will not be reclassified to the consolidated income statement in subsequent periods Items that may be reclassified to the consolidated income statement in subsequent periods: Gains on cash flow hedging instruments Exchange differences on translating foreign operations Related tax impact Total items that may be reclassified to the consolidated income statement in subsequent periods Total other comprehensive income, net of tax Total comprehensive income Total comprehensive income attributable to: Owners of the parent Non-controlling interests For the years ended December 31, Note 2017 2016 (€ thousand) 2015 537,396 399,718 290,054 21 21 21 21 21 (730) 203 (1,448) (18) (527) (1,446) 898 (308) 590 34,971 (15,346) 51,086 4,118 (9,757) (16,943) 8,234 13,344 (2,600) 9,868 38,261 18,978 9,341 36,795 19,568 546,737 436,513 309,622 545,071 435,691 306,699 1,666 822 2,923 The accompanying notes are an integral part of the Consolidated Financial Statements. 226 Ferrari N.V. Ferrari N.V. CONSOLIDATED STATEMENT OF CASH FLOWS for the years ended December 31, 2017, 2016 and 2015 CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY for the years ended December 31, 2017, 2016 and 2015 Cash and cash equivalents at beginning of the year Cash flows from operating activities: Profit before taxes Amortization and depreciation Provision accruals Result from investments Net finance costs Other non-cash expenses/(income) Net gains on disposal of property, plant and equipment and intangible assets Change in inventories Change in trade receivables Change in trade payables Change in receivables from financing activities Change in other operating assets and liabilities Finance income received Finance costs paid Income tax paid Total Cash flows used in investing activities: Investments in property, plant and equipment Investments in intangible assets Proceeds from the sale of property, plant and equipment and intangible assets Proceeds from exercising the Delta Topco option Proceeds from the sale of a majority stake in FFS GmbH Proceeds from the sale of assets and liabilities related to investment properties Change in investments and other financial assets Total Cash flows used in financing activities: Proceeds from bonds Proceeds from securitizations, net of repayments Proceeds from Term Loan and Bridge Loan Repayment of Term Loan Repayment of Bridge Loan Net change in other bank borrowings Net change in other debt Net change in deposits in FCA Group cash management pools and financial liabilities with FCA Group Cash distribution of reserves Dividends paid to non-controlling interest Acquisition of non-controlling interest Change in equity Total Translation exchange differences Total change in cash and cash equivalents Cash and cash equivalents at end of the year For the years ended December 31, 2016 (€ thousand) 2017 2015 457,784 182,753 134,278 746,156 260,606 13,473 (2,437) 29,260 43,453 (2,585) (88,483) (1,745) 29,333 (44,123) (72,803) 4,402 (36,222) (215,486) 662,799 (188,904) (202,506) 3,663 8,307 — — — (379,440) 567,353 247,717 82,418 (3,066) 27,729 (38,465) (2,652) (33,187) (88,847) 106,163 404,568 7,149 2,684 (22,239) (252,026) 1,005,299 (175,647) (166,340) 2,931 — 18,595 — — (320,461) 434,169 274,757 50,873 — 10,151 38,813 (6,964) (2,885) 15,693 (45,792) 120,902 (24,698) 5,347 (18,081) (145,017) 707,268 (184,910) (171,033) 1,370 — — 37,130 377 (317,066) 694,172 141,115 — (795,254) 490,729 462,700 — — — 1,994,712 — — 123,993 (11,114) (700,846) — (500,000) (211,832) 15,847 4,385 (8,280) — 135,094 (2,396,422) (119,985) (1,218) — — (85,065) (8,372) 189,922 647,706 (86,905) (17,207) — 1,384 (411,036) 1,229 275,031 457,784 — (53,942) (8,500) — (351,273) 9,546 48,475 182,753 Share capital Retained earnings and other reserves Cash flow hedge reserve Currency translation differences Remeasu- rement of defined benefit plans Equity attributable to owners of the parent Non- controlling interests Total (€ thousand) At January 1, 2015 3,778 2,503,614 (58,557) 29,912 (9,129) 2,469,618 8,695 2,478,313 Transaction with non- controlling interest Net profit Other comprehensive income/(loss) Restructuring (1) Share premium contribution (2) Reclassification (3) — — — (2,602) 287,816 — — — — — — (2,602) (5,898) (8,500) 287,816 2,238 290,054 — 5,634 12,659 590 18,883 685 19,568 — (2,800,000) — — 1,162 (2,117) — — — — — — — (2,800,000) — (2,800,000) — 1,162 2,117 — — — 1,162 — At December 31, 2015 3,778 (12,127) (52,923) 42,571 (6,422) (25,123) 5,720 (19,403) 398,762 — — — 398,762 956 399,718 — 34,143 4,252 (1,466) 36,929 (134) 36,795 Net profit Other comprehensive income/(loss) Cash distribution of reserves Dividends to non- controlling interests Share-based compensation (4) Separation (5) — — — — — (1,274) Net profit Other comprehensive income/(loss) Cash distribution of reserves Dividends to non- controlling interests Share-based compensation (4) — — — — — At December 31, 2016 2,504 302,336 (18,780) 46,823 (7,888) 324,995 535,393 — — — 535,393 (86,905) — 1,110 1,496 — — — — — — — — — — — — (86,905) — (86,905) — (1,732) (1,732) 1,110 222 — — 1,110 222 4,810 2,003 329,805 537,396 — 25,214 (15,009) (527) 9,678 (337) 9,341 (119,985) — 28,597 — — — — — — — — — (119,985) — (119,985) — (1,218) (1,218) 28,597 — 28,597 At December 31, 2017 2,504 746,341 6,434 31,814 (8,415) 778,678 5,258 783,936 (1) Relates to the remaining principal amount of the note issued by the Company to FCA (“FCA Note”) recognized in connection with the Restructuring. (2) Relates to the effect of a share premium contribution made by FCA N.V. in connection with the Restructuring. (3) Relates to the reclassification of the actuarial gain recognized on the remeasurement of the defined benefit pension plan of the former Chairman of the Group. (4) Relates to the equity-settled Non-Executive Directors’ compensation and from 2017 also the equity incentive plan. See Note 21 “Equity” and Note 22 “Share-based Compensation” for additional details. (5) Reflects the effects of the Separation. The accompanying notes are an integral part of the Consolidated Financial Statements. The accompanying notes are an integral part of the Consolidated Financial Statements. 228 229 FINANCIAL STATEMENTS FERRARI N.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT DECEMBER 31, 2017 AND 2016 1. BACKGROUND AND BASIS OF PRESENTATION Background Ferrari is among the world’s leading luxury brands. The activities of Ferrari N.V. (herein referred to as “Ferrari” or the “Company” and together with its subsidiaries the “Group”) and its subsidiaries are focused on the design, engineering, production and sale of luxury performance sports cars. The cars are designed, engineered and produced in Maranello and Modena, Italy and sold in more than 60 markets worldwide through a network of 164 authorized dealers operating 185 points of sale. The Ferrari brand is licensed to a selected number of producers and retailers of luxury and lifestyle goods, with Ferrari branded merchandise also sold through a network of 18 Ferrari-owned stores and 30 franchised stores (including 8 Ferrari Store Junior), as well as on the Group’s website. To facilitate the sale of new and used cars, the Group provides various forms of financing, through cooperation and other agreements, to both clients and dealers. Ferrari also participates in the Formula 1 World Championship through Scuderia Ferrari. The activities of Scuderia Ferrari are the core element of Ferrari marketing and promotional activities and an important source of innovation supporting the technological advancement of Ferrari sports and street cars. Fiat S.p.A. (merged with and into Fiat Chrysler Automobiles N.V. in October 2014, Fiat S.p.A. and Fiat Chrysler Automobiles are defined as “FCA” as the context requires and together with their subsidiaries the “FCA Group”) acquired 50 percent of Ferrari S.p.A. in 1969, and over time expanded its shareholding to 90 percent ownership, while the remaining 10 percent non-controlling interest was owned by Piero Ferrari. On October 29, 2014, Fiat Chrysler Automobiles N.V. (“FCA”) announced its intention to separate Ferrari S.p.A. from FCA. The separation was completed on January 3, 2016 and occurred through a series of transactions (together defined as the “Separation”) including (i) an intra-group restructuring which resulted in the Company’s acquisition of the assets and business of Ferrari North Europe Limited and the transfer by FCA of its 90 percent shareholding in Ferrari S.p.A. to the Company, (ii) the transfer of Piero Ferrari’s 10 percent shareholding in Ferrari S.p.A. to the Company, (iii) the initial public offering of common shares of the Company on the New York Stock Exchange, and (iv) the distribution, following the initial public offering, of FCA’s remaining interest in the Company to FCA’s shareholders. Following the Separation, Ferrari operates as an independent, publicly traded company. The transactions described above in (i) and (ii) (referred to collectively as the “Restructuring”) were completed in October 2015. The Restructuring comprised: (i) a capital reorganization of the group under the Company, which has been accounted for in the consolidated financial statements as though it had occurred effective January 1, 2015 using FCA’s basis of accounting, and (ii) the issuance of the FCA Note, which has been reflected in the consolidated financial statements only from the date on which it occurred. The remaining steps of the Separation, which were completed between January 1 and January 3, 2016 through two consecutive demergers followed by a merger under Dutch law, have been reflected in these consolidated financial statements only from the date on which the related transactions occurred and had no impact on the Company’s results of operations or financial position. As part of the Separation a new entity, FE New N.V., was created. Pursuant to the demergers the shares in the Company held by FCA were ultimately transferred to FE New N.V., with FE New N.V. issuing shares in its capital to the shareholders of FCA. In connection with the demergers, the mandatory convertible security holders of FCA also received shares in FE New N.V. On completion of the Separation the Company was merged with and into FE New N.V. and FE New N.V. was renamed Ferrari N.V. Following the Separation, the cash pooling and financial liabilities with the FCA Group were settled and the relevant agreements were terminated. The derivative contracts that were previously held by FCA were novated to Ferrari S.p.A. On January 4, 2016 the Company also completed the listing of its common shares on the Mercato Telematico Azionario, the stock exchange managed by Borsa Italiana, under the ticker symbol RACE. At December 31, 2017, the fully paid up share capital of the Company amounted to €2,504 thousand, comprising common shares and special voting shares all with nominal value of €0.01 per share. At December 31, 2017, the Company had 188,953,874 common shares and 56,493,519 special voting shares issued and outstanding. References to the Company in these consolidated financial statements refer to Ferrari N.V. (formerly named FE New N.V.) following the Separation and to Ferrari N.V.’s predecessor (formerly named New Business Netherlands N.V.), prior to the completion of the Separation. Basis of preparation Authorization of consolidated financial statements and compliance with International Financial Reporting Standards These consolidated financial statements of Ferrari N.V. were authorized for issuance on February 23, 2018. The consolidated financial statements have been prepared in accordance with the International Financial Reporting Standards as issued by the International Accounting Standards Board and endorsed by the European Union (“EU-IFRS”) and with Part 9 of Book 2 of the Dutch Civil Code. The designation IFRS also includes International Accounting Standards (“IAS”) as well as all the interpretations of the International Financial Reporting Interpretations Committee (“IFRIC” and “SIC”). The consolidated financial statements are prepared under the historical cost method, modified as required for the measurement of certain financial instruments, as well as on a going concern basis. The Group’s presentation currency is the Euro, which is also the functional currency of the Company, and unless otherwise stated information is presented in thousands of Euro. Transactions with FCA The Group generates a portion of its net revenues from sale of goods to other FCA Group companies. In particular, net revenues generated from FCA Group companies amounted to €324,033 thousand, €248,685 thousand and €194,506 thousand for the years ended December 31, 2017, 2016 and 2015, respectively. See Note 29 for further details. The Group enters into commercial transactions with the FCA Group in the ordinary course of business. 230 231 FINANCIAL STATEMENTS FERRARI N.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT DECEMBER 31, 2017 AND 2016 Receivables and payables are settled in the ordinary course of business and are recorded as assets and liabilities on the consolidated statement of financial position. Historically the Group received various services, including human resources, payroll, financial reporting and tax, customs, accounting and treasury, institutional and industrial relations, procurement of insurance coverage, internal audit, IT and systems, risk, corporate security, executive compensation, legal and corporate affairs from the FCA Group. Following the Separation, the Group has been gradually internalizing these services. The costs for the recharge of services received, including costs for termination packages, totaled €8,548 thousand, €15,021 thousand and €11,559 thousand for the years ended December 31, 2017, 2016 and 2015, respectively. These costs were recharged by the FCA Group based on the actual costs incurred for the services provided to the Group and are reflected as expenses according to their nature in the consolidated financial statements. Prior to the Separation the Group participated in a group-wide cash management system at FCA Group, where the operating cash management, main funding operations and liquidity investment of the Group were centrally coordinated by dedicated treasury companies. The Group accessed funds deposited in these accounts on a daily basis, had the contractual right to withdraw these funds on demand and terminate these cash management arrangements depending on FCA’s ability to pay at the relevant time. The deposits with FCA Group relating to the cash management system were recorded in the consolidated statement of financial position as “Deposits in FCA Group cash management pools” and the finance income earned on such deposits was recorded as net financial income/expenses in the consolidated income statement. Prior to the Separation, certain entities of the Group also entered into credit lines with FCA Group entities. These financial liabilities were provided primarily to finance the activities of the Group’s financial services portfolio in North America and were recorded as “Debt” in the consolidated statement of financial position. The finance expense associated with such financial liabilities was recorded in “Cost of sales” in the consolidated income statement. The deposits with FCA Group relating to the cash management and the credit lines with FCA Group entities were settled and terminated following the Separation. Management believes that the assumptions underlying the consolidated financial statements for the periods prior to the Separation, including the recharges of expenses from FCA, are reasonable. Nevertheless, for the periods prior to the Separation, the consolidated financial statements may not include all of the actual expenses that would have been incurred by the Group and may not reflect the consolidated results of operations, financial position and cash flows had Ferrari been a stand-alone company during those periods. Actual costs that would have been incurred if Ferrari had been a stand-alone company would depend on multiple factors, including organizational structure and strategic decisions made in various areas. 2. SIGNIFICANT ACCOUNTING POLICIES Format of the financial statements The consolidated financial statements include the consolidated income statement, consolidated state- ment of comprehensive income, consolidated statement of financial position, consolidated statement of cash flows, consolidated statement of changes in equity and notes thereto, (the “Consolidated Financial Statements”). For presentation of the consolidated income statement, the Group uses a classification based on the function of expenses, as it is more representative of the format used for internal reporting and management purposes and is consistent with international practice. In the consolidated income statement, the Group also presents a subtotal for Earnings Before Interest and Taxes (EBIT). EBIT distinguishes between the profit before taxes arising from operating items and those aris- ing from financing activities. EBIT is the primary measure used by the Group’s Chief Operating Decision Maker (“CODM”) to assess performance. For the consolidated statement of financial position, a mixed format has been selected to present current and non-current assets and liabilities, as permitted by IAS 1 paragraph 60. More specifically, the Consolidated Financial Statements include both industrial companies and financial services companies. The investment port- folios of the financial services companies are included in current assets as the investments will be realized in their normal operating cycle. However, the financial services companies obtain only a portion of their funding from the market; the remainder has historically been obtained mainly through funding from certain of the Group’s operating companies and, to a lesser extent, prior to the Separation, intercompany funding from FCA Group, which provided funding to the financial services entities as the need arose. This financial service structure within the Group does not allow the separation of financial liabilities funding the financial services operations (whose assets are reported within current assets) and those funding the industrial operations. Presentation of financial liabilities as current or non-current based on their date of maturity would not facilitate a meaningful comparison with financial assets, which are categorized on the basis of their normal operating cycle. Disclosure as to the due date of the debt is provided in Note 25. The consolidated statement of cash flows is presented using the indirect method. Starting from 2017, the Group has disclosed separately finance income received and finance costs paid on the consolidated statement of cash flows. The comparative information for the years ended December 31, 2016 and 2015 has been reclassified accordingly. This did not affect any of the subtotals presented on the consolidated statement of cash flows. New standards and amendments effective from January 1, 2017 The following new standards and amendments that are applicable from January 1, 2017 were adopted by the Group for the preparation of these Consolidated Financial Statements. • The Group adopted the amendments to IAS 12 - Income taxes. The amendments clarify how to account for deferred tax assets related to debt instruments measured at fair value. Specifically, the amendments clarify the requirements on recognition of deferred tax assets for unrealized losses in order to address diversity in practice. There was no effect from the adoption of these amendments. • The Group adopted the amendments to IAS 7 - Statement of Cash Flows, which requires companies to provide information about changes in their financing liabilities. The amendments are aimed at improving disclosures so that users of financial statements are better able to understand the changes in a company’s debt, including changes from cash flows and non-cash changes. There was no effect from the adoption of these amendments. • The Group adopted the amendments to IFRS 12 - Disclosure of Interests in Other Entities which were included in the Annual Improvements to IFRSs 2014 - 2016 Cycle. The amendments relate to disclosures of an entity’s interest in a subsidiary, a joint venture or an associate (or a portion of its interest in a joint venture or an associate) that is classified (or included in a disposal group that is classified) as held for sale in accordance with IFRS 5. There was no effect from the adoption of these amendments. 232 233 FINANCIAL STATEMENTS FERRARI N.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT DECEMBER 31, 2017 AND 2016 New standards, amendments and interpretations not yet effective The following new standards, amendments and interpretations have been issued by the International Accounting Standards Board (“IASB”) and adopted by the European Union, but are not yet effective for the year ended December 31, 2017, or have been issued by the IASB and not adopted by the European Union. The following new standards, amendments and interpretations have not been applied in preparing the Consolidated Financial Statements. Issued by the IASB and adopted by the European Union In May 2014, the IASB issued IFRS 15 - Revenue from Contracts with Customers. The standard requires a company to recognize revenue upon transfer of control of goods or services to a customer at an amount that reflects the consideration it expects to receive. This new revenue recognition model defines a five step process to achieve this objective. The updated guidance also requires additional disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. In April 2016, the IASB issued amendments to the standard which do not change the underlying principles of the standard, but clarify how those principles should be applied. The amendments clarify how to identify a performance obligation in a contract, determine whether a company is a principal or an agent and determine whether the revenue from granting a license should be recognized at a point in time or over time. The amendments also provide two additional reliefs to reduce cost and complexity. The standard and amendments are effective for annual periods beginning on or after January 1, 2018, with earlier adoption permitted. The Group will adopt the standard and amendments for its annual period beginning on January 1, 2018. The Group has completed its analysis of the impact of adoption, including an analysis of each of the Group’s revenue streams by applying the five-step model provided under IFRS 15. In performing the analysis, the Group identified the main revenue streams (please refer to Note 4), and as permitted under the standard, applied the guidance in IFRS 15 to portfolios of contracts (or performance obligations) with similar characteristics in situations where the Group reasonably expects that the effects on the financial statements of applying the standard to the portfolio would not differ materially from applying the standard to the individual contracts (or performance obligations) within that portfolio. Based on the analysis performed, the Group concluded that the current accounting treatment of revenue from contracts with customers is in accordance with the requirements of IFRS 15. The Group will not apply any of the practical expedients permitted upon transition under the guidance in appendix C of IFRS 15. As permitted under IFRS 15, the Group will adopt the standard and amendments retrospectively with the cumulative effect of initial adoption recognized at the date of initial application (the “modified retrospective approach”), which has been determined to be January 1, 2018 and there will be no material impact on the Group’s consolidated financial statements upon initial adoption of the standard and amendments. In July 2014 the IASB issued IFRS 9 - Financial Instruments. The improvements introduced by the new standard includes a logical approach for classification and measurement of financial instruments driven by cash flow characteristics and the business model in which an asset is held, a single “expected loss” impairment model for financial assets and a substantially reformed approach for hedge accounting. The standard is effective, retrospectively with limited exceptions, for annual periods beginning on or after January 1, 2018 with earlier application permitted. The Group has completed its analysis of the impact of adoption, including an analysis of each of the Group’s classes of financial assets, financial liabilities and derivative instruments by applying the requirements provided by the new standard. Based on the analysis performed, the Group concluded that the current accounting treatment of financial assets, financial liabilities and derivative instruments is in accordance with the requirements of IFRS 9 and, therefore, there will be no material impact on the Group’s consolidated financial statements upon initial adoption of the standard. In January 2016, the IASB issued IFRS 16 - Leases which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract and replaces the previous leases standard, IAS 17 - Leases. IFRS 16, which is not applicable to service contracts, but only applicable to leases or lease components of a contract, defines a lease as a contract that conveys to the customer (lessee) the right to use an asset for a period of time in exchange for consideration. IFRS 16 eliminates the classification of leases for the lessee as either operating leases or finance leases as required by IAS 17 and, instead, introduces a single lessee accounting model whereby a lessee is required to recognize assets and liabilities for all leases with a term that is greater than 12 months, unless the underlying asset is of low value, and to recognize depreciation of lease assets separately from interest on lease liabilities in the income statement. As IFRS 16 substantially carries forward the lessor accounting requirements in IAS 17, a lessor will continue to classify its leases as operating leases or finance leases and to account for those two types of leases differently. IFRS 16 is effective from January 1, 2019 with early adoption allowed only if IFRS 15 - Revenue from Contracts with Customers is also applied. The Group will not early adopt the standard and is currently evaluating the method of implementation and impact of adoption. In December 2016, the IASB issued Annual Improvements to IFRSs 2014 - 2016 Cycle, which has amendments to three Standards: IFRS 12 - Disclosure of Interests in Other Entities (effective date of January 1, 2017), IFRS 1- First-time Adoption of International Financial Reporting Standards (effective date of January 1, 2018) and IAS 28 - Investments in Associates and Joint Ventures (effective date of January 1, 2018). The amendments clarify, correct or remove redundant wording in the related IFRS Standard and are not expected to have a material impact upon adoption. Issued by the IASB and not adopted by the European Union In June 2016, the IASB issued amendments to IFRS 2 - Share-Based Payment, which provide requirements on the accounting for (i) the effects of vesting and non-vesting conditions on the measurement of cash-settled share-based payments; (ii) share-based payment transactions with a net settlement feature for withholding tax obligations; and (iii) a modification to the terms and conditions of a share-based payment that changes the classification of the transaction from cash-settled to equity-settled. The amendments are effective for annual periods beginning on or after January 1, 2018 with early application permitted. The Group will apply the amendments to share-based payment transactions under the Group’s equity incentive plan that contains a net settlement feature for withholding tax obligations, resulting in such transactions being classified in their entirety as equity-settled. The Group does not expect any additional impact from the adoption of these amendments. In December 2016, the IASB issued IFRIC Interpretation 22 - Foreign Currency Transactions and Advance Consideration which addresses the exchange rate to use in transactions that involve advance consideration paid or received in a foreign currency. The interpretation is effective on or after January 1, 2018. The Group is currently evaluating the impact of adoption of this interpretation. In May 2017, the IASB issued IFRS 17 - Insurance Contracts which establishes principles for the recognition, measurement, presentation and disclosure of insurance contracts issued as well as guidance relating to reinsurance contracts held and investment contracts with discretionary participation features issued. IFRS 17 is effective on or 234 235 FINANCIAL STATEMENTS FERRARI N.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT DECEMBER 31, 2017 AND 2016 after January 1, 2021 with early adoption allowed if IFRS 15 - Revenue from Contracts with Customers and IFRS 9 - Financial Instruments are also applied. The Group does not expect any impact from the adoption of this standard. In June 2017, the IASB issued IFRIC Interpretation 23 - Uncertainty over Income Tax Treatments which provides requirements regarding how to reflect uncertainties in accounting for income taxes. The interpretation is effective on or after January 1, 2019. The Group is currently evaluating the impact of adoption of this interpretation. In October 2017 the IASB issued Amendments to IFRS 9 - Financial Instruments that allow, under certain conditions, for a prepayable financial asset with negative compensation payments to be measured at amortized cost or at fair value through other comprehensive income. The final amendments also contain a clarification relating to the accounting for a modification or exchange of a financial liability measured at amortized cost that does not result in the derecognition of the financial liability. The amendments are effective on or after January 1, 2019. The Group does not expect any impact from the adoption of these amendments. In October 2017 the IASB issued amendments to IAS 28 - Long Term Interests in Associates and Joint Ventures to clarify that an entity applies IFRS 9 to long-term interests in an associate or joint venture that form part of the net investment in the associate or joint venture but to which the equity method is not applied. The amendment is effective on or after January 1, 2019. The Group does not expect a material impact from the adoption of these amendments. In December 2017, the IASB issued Annual Improvements to IFRSs 2015 - 2017 Cycle, which has amendments to the following four Standards: IFRS 3 - Business Combinations, in relation to obtaining control of a business which was previously accounted for as an interest in a joint operation, IFRS 11- Joint Arrangements, in relation to obtaining joint control of a business which was previously accounted for as a joint operation, IAS 12 - Income Taxes, clarifying the treatment of taxes in relation to dividend payments and IAS 23 - Borrowing Costs, clarifying the treatment of borrowings which were previously capitalized when the related asset is ready for its intended use or sale. The amendments are effective on or after January 1, 2019. The Group is currently evaluating the impact of adoption of these amendments. In February 2018, the IASB issued amendments to IAS 19 - Employee Benefits. When there is a change to a defined benefit plan (an amendment, curtailment or settlement) the amendments require that a company use the updated assumptions from the remeasurement of a net defined benefit liability or asset to determine current service cost and net interest for the remainder of the reporting period after the change to the plan. These amendments are effective on or after January 1, 2019. The Group does not expect a material impact from the adoption of these amendments. Basis of consolidation Subsidiaries Subsidiaries are entities over which the Group has control. Control is achieved when the Group has power over the investee, when it is exposed to, or has rights to, variable returns from its involvement with the investee, and has the ability to use its power over the investee to affect the amount of the investor’s returns. Subsidiaries are consolidated on a line by line basis from the date on which the Group achieves control. The Group reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control listed above. The Group recognizes any non-controlling interests (“NCI”) in the acquiree on an acquisition-by- acquisition basis, either at fair value or at the non-controlling interest’s share of the recognized amounts of the acquiree’s identifiable net assets. Net profit or loss and each component of other comprehensive income/(loss) are attributed to the owners of the parent and to the non-controlling interests. Total comprehensive income/ (loss) of subsidiaries is attributed to owners of the parent and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance. All significant intra-group balances and transactions and any unrealized gains and losses arising from intra-group transactions are eliminated in preparing the Consolidated Financial Statements. Subsidiaries are deconsolidated from the date when control ceases. When the Group ceases to have control over a subsidiary, it derecognizes the assets (including any goodwill) and liabilities of the subsidiary at their carrying amounts, derecognizes the carrying amount of non-controlling interests in the former subsidiary and recognizes the fair value of any consideration received from the transaction. Any retained interest in the former subsidiary is then remeasured to its fair value. In 2016 the Group sold a majority stake in Ferrari Financial Services GmbH. From such date, the Group’s remaining interest has been remeasured at fair value and accounted for using the equity method. Interests in associates An associate is an entity over which the Group has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee but without having control or joint control over those policies. Associates are accounted for using the equity method of accounting from the date significant influence is obtained. Under the equity method, the investments are initially recognized at cost and adjusted thereafter to recognize the Group’s share of the profit/(loss) and other comprehensive income/(loss) of the investee. The Group’s share of the investee’s profit/(loss) is recognized in the consolidated income statement. Distributions received from an investee reduce the carrying amount of the investment. Post-acquisition movements in other comprehensive income/(loss) are recognized in other comprehensive income/(loss) with a corresponding adjustment to the carrying amount of the investment. Unrealized gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associate. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. When the Group’s share of the losses of an associate exceeds the Group’s interest in that associate, the Group discontinues recognizing its share of further losses. Additional losses are provided for, and a liability is recognized, only to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of the associate. The Group discontinues the use of the equity method from the date the investment ceases to be an associate or when it is classified as available-for-sale. 236 237 FINANCIAL STATEMENTS FERRARI N.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT DECEMBER 31, 2017 AND 2016 Interests in joint operations A joint operation is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the assets and obligations for the liabilities, relating to the arrangement. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control. When the Group undertakes its activities under joint operations, it recognizes in relation to its interest in the joint operation: (i) its assets, including its share of any assets held jointly, (ii) its liabilities, including its share of any liabilities incurred jointly, (iii) its revenue from the sale of its share of the output arising from the joint operation, (iv) its share of the revenue from the sale of the output by the joint operation, and (v) its expenses, including its share of any expenses incurred jointly. Foreign currency transactions The functional currency of the Group’s entities is the currency of their primary economic environment. In individual companies, transactions in foreign currencies are recorded at the exchange rate prevailing at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the foreign currency exchange rate prevailing at that date. Exchange differences arising on the settlement of monetary items or on reporting monetary items at rates different from those at which they were initially recorded during the period or in previous financial statements are recognized in the consolidated income statement. The principal foreign currency exchange rates used to translate other currencies into Euro were as follows: Average 1.1297 0.8767 1.1117 126.7112 7.6290 1.4732 1.4647 1.5588 8.8045 2017 At December 31, 1.1993 0.8872 1.1702 135.0100 7.8044 1.5346 1.5039 1.6024 9.3720 Average 1.1069 0.8194 1.0901 120.2169 7.3519 1.4883 1.4659 1.5275 8.5924 2016 At December 31, 1.0541 0.8562 1.0739 123.4000 7.3202 1.4596 1.4188 1.5234 8.1751 Average 1.1094 0.7259 1.0677 134.2956 6.9723 1.4775 1.4184 1.5253 8.6014 2015 At December 31, 1.0887 0.7340 1.0835 131.0700 7.0608 1.4897 1.5116 1.5417 8.4376 U.S. Dollar Pound Sterling Swiss Franc Japanese Yen Chinese Yuan Australian Dollar Canadian Dollar Singapore Dollar Hong Kong Dollar Intangible assets Goodwill Goodwill is not amortized, but is tested for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired. After initial recognition, goodwill is measured at cost less any accumulated impairment losses. Consolidation of foreign entities Development costs All assets and liabilities of foreign consolidated companies with a functional currency other than the Euro are translated using the closing rates at the date of the consolidated statement of financial position. Income and expenses are translated into Euro at the average foreign currency exchange rate for the period. Translation differences resulting from the application of this method are classified as currency translation differences within other comprehensive income/(loss) until the disposal of the investment. Average foreign currency exchange rates for the period are used to translate the cash flows of foreign subsidiaries in preparing the consolidated statement of cash flows. Goodwill, assets acquired and liabilities assumed arising from the acquisition of entities with a functional currency other than the Euro are recognized in the Consolidated Financial Statements in the functional currency and translated at the foreign currency exchange rate at the acquisition date. These balances are translated at subsequent balance sheet dates at the relevant foreign currency exchange rate. Development costs for car project production and related components, engines and systems are recognized as an asset if, and only if, both of the following conditions under IAS 38 - Intangible Assets are met: that development costs can be measured reliably and that the technical feasibility of the product, volumes and pricing support the view that the development expenditure will generate future economic benefits. Capitalized development costs include all direct and indirect costs that may be directly attributed to the development process. Capitalized development costs are amortized on a straight-line basis from the start of production over the estimated lifecycle of the model and the useful life of the components (generally between four and eight years). All other research and development costs are expensed as incurred. In particular the Group incurs significant research and development costs through the Formula 1 racing activities. These costs are considered fundamental to the development of the sports and street car models and prototypes. The model for the Formula 1 racing activities continually evolves and as such these costs are expensed as incurred. Patents, concessions and licenses Separately acquired patents, concessions and licenses are initially recognized at cost. Patents, concessions and licenses acquired in a business combination are initially recognized at fair value. Patents, concessions and licenses are amortized on a straight-line basis over their useful economic lives, which is generally between three and five years. 238 239 FINANCIAL STATEMENTS FERRARI N.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT DECEMBER 31, 2017 AND 2016 Other intangible assets Other intangible assets mainly relate to the registration of trademarks and have been recognized in accordance with IAS 38 - Intangible Assets, where it is probable that the use of the asset will generate future economic benefits for the Group and where the cost of the asset can be measured reliably. Other intangible assets are measured at cost less any impairment losses and amortized on a straight-line basis over their estimated life, which is generally between three and five years. Property, plant and equipment Cost Property, plant and equipment is initially recognized at cost which comprises the purchase price, any costs directly attributable to bringing the assets to the location and condition necessary to be capable of operating in the manner intended by management, capitalized borrowing costs and any initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located. Self-constructed assets are initially recognized at production cost. Subsequent expenditures and the cost of replacing parts of an asset are capitalized only if they increase the future economic benefits embodied in that asset. All other expenditures are expensed as incurred. When such replacement costs are capitalized, the carrying amount of the parts that are replaced is recognized as a loss in the period of replacement in the consolidated income statement. Depreciation Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets, as follows: Industrial buildings Plant, machinery and equipment Other assets Land is not depreciated. Depreciation rates 3% - 20% 5% - 22% 12% - 25% If the asset being depreciated consists of separately identifiable components whose useful lives differ from that of the other parts making up the asset, depreciation is charged separately for each of its component parts through application of the ‘component approach’. Borrowing costs General and specific borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use. All other borrowing costs are expensed in net financial expenses if related to the Group’s industrial activities or cost of sales if related to the Group’s financial services activities in the consolidated income statement, as incurred. Impairment of assets The Group continuously monitors its operations to assess whether there is any indication that its intangible assets (including development costs) and its property, plant and equipment may be impaired. Goodwill is tested for impairment annually or more frequently, if there is an indication that an asset may be impaired. If indications of impairment are present, the carrying amount of the asset is reduced to its recoverable amount, which is the higher of fair value less costs of disposal and its value in use. The recoverable amount is determined for the individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets, in which case the asset is tested as part of the cash-generating unit (“CGU”) to which the asset belongs. A CGU is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. In assessing the value in use of an asset or CGU, the estimated future cash flows are discounted to their present value using a discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or CGU. An impairment loss is recognized if the recoverable amount is lower than the carrying amount. Where an impairment loss for assets other than goodwill, subsequently no longer exists or has decreased, the carrying amount of the asset or CGU is increased to the revised estimate of its recoverable amount, but not in excess of the carrying amount that would have been recorded had no impairment loss been recognized. The reversal of an impairment loss is recognized in the consolidated income statement immediately. Financial instruments Presentation Financial instruments held by the Group are presented in the Consolidated Financial Statements as described in the following paragraphs. Investments and other financial assets include investment properties, investments in unconsolidated companies and other non-current financial assets. Current financial assets, as defined in IAS 39 - Financial Instruments: Recognition and Measurement, include trade receivables, receivables from financing activities and current financial assets (which include derivative financial instruments stated at fair value), deposits in FCA Group cash management pools and cash and cash equivalents. Financial liabilities comprise debt (which include bank borrowings and financial liabilities with FCA Group) and other financial liabilities (which mainly include derivative financial instruments stated at fair value), trade payables and other liabilities. 240 241 FINANCIAL STATEMENTS FERRARI N.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT DECEMBER 31, 2017 AND 2016 Measurement Non-current financial assets other than investments, as well as current financial assets and financial liabilities, are accounted for in accordance with IAS 39 - Financial Instruments: Recognition and Measurement. Current financial assets are recognized on the basis of the settlement date and, on initial recognition, are measured at acquisition cost. Subsequent to initial recognition, current financial assets are measured at fair value. When market prices are not directly available, the fair value of current financial assets are measured using appropriate valuation techniques (e.g. discounted cash flow analysis based on market information available at the balance sheet date). Loans and receivables which are not held by the Group for trading (loans and receivables originating in the ordinary course of business) and equity investments whose fair value cannot be determined reliably, are measured, to the extent that they have a fixed term, at amortized cost, using the effective interest rate method. When the financial assets do not have a fixed term, they are measured at acquisition cost. Receivables with maturities of over one year which bear no interest or an interest rate significantly lower than market rates are discounted using market rates. Assessments are made regularly as to whether there is any objective evidence that a financial asset or group of assets may be impaired. If any such evidence exists, an impairment loss is included in the consolidated income statement for the period within net financial income/(expenses). Except for derivative instruments, financial liabilities are measured at amortized cost using the effective interest rate method. Derivative financial instruments Derivative financial instruments are used for economic hedging purposes, in order to reduce currency risks. In accordance with IAS 39, derivative financial instruments qualify for hedge accounting only when at the inception of the hedge there is formal designation and documentation of the hedging relationship, the hedge is expected to be highly effective, its effectiveness can be reliably measured and it is highly effective throughout the financial reporting periods for which it is designated. All derivative financial instruments are measured at fair value. but the hedged transaction is still expected to occur, the cumulative gain or loss realized to the point of termination remains in other comprehensive income/(loss) and is recognized in the consolidated income statement at the same time as the underlying transaction occurs. If the hedged transaction is no longer probable, the cumulative unrealized gain or loss held in other comprehensive income/ (loss) is recognized in the consolidated income statement immediately. The Group did not use fair value hedges or hedges of a net investment in the period covered by these Consolidated Financial Statements. For further information on the effects reflected on the consolidated income statement from derivative financial instruments refer to Note 20. If hedge accounting cannot be applied, the gains or losses from the fair value measurement of derivative financial instruments are recognized immediately in the consolidated income statement within net financial income/(expenses). Trade receivables Trade receivables are amounts due from clients for goods sold or services provided in the ordinary course of business. Trade receivables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest rate method, less any provision for allowances. Inventories Inventories of raw materials, semi-finished products and finished goods are stated at the lower of cost and net realizable value, cost being determined on a first-in first-out (FIFO) basis. The measurement of inventories includes the direct costs of materials, labor and indirect costs (variable and fixed). Purchase costs include ancillary costs. Prototypes are recognized at their estimated realizable value, if lower than production cost. Provision is made for obsolete and slow-moving raw materials, finished goods, spare parts and other supplies based on their expected future use and realizable value. Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs for sale and distribution. When derivative financial instruments qualify for hedge accounting, the following accounting treatments Transfers of financial assets • Cash flow hedges - Where a derivative financial instrument is designated as a hedge of the exposure to variability in future cash flows of a recognized asset or liability or a highly probable forecasted transaction and could affect the consolidated income statement, the effective portion of any gain or loss on the derivative financial instrument is recognized directly in other comprehensive income/ (loss). The cumulative gain or loss is reclassified from other comprehensive income/(loss) to the consolidated income statement at the same time as the economic effect arising from the hedged item affects the consolidated income statement. The gain or loss associated with a hedge or part of a hedge that has become ineffective is recognized in the consolidated income statement immediately within net financial income/(expense). When a hedging instrument or hedge relationship is terminated The Group sells certain of its trade receivables through factoring transactions without recourse. In addition, the Group sells certain of its receivables from financing activities under securitization programs. Securitization transactions involve the sale, on a non-recourse basis, of a financial receivables portfolio to a special purpose vehicle, which in turn finances the purchase of such financial receivables by issuing asset- backed securities in the form of notes whose repayment of principal and interest depends on the cash flows generated by the related financial receivables. The Group derecognizes the financial assets when, and only when, the contractual rights and risks to the cash flows arising from the related financial assets are no longer held or the Group has transferred the financial assets. In the case of a transfer of financial assets, if the Group transfers substantially all the risks and 243 apply: 242 FINANCIAL STATEMENTS FERRARI N.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT DECEMBER 31, 2017 AND 2016 rewards of ownership of the financial assets, it derecognizes such assets and separately recognizes as assets or liabilities any rights and obligations created or retained in the transfer. On derecognition of financial assets, the difference between the carrying amount of the assets and the consideration received or receivable for the transfer of the assets is recognized in the consolidated income statement in cost of sales. Cash and cash equivalents Cash and cash equivalents includes cash in hand, deposits held at call with banks and other short-term highly liquid investments with original maturities of three months or less. Employee benefits Defined contribution plans Costs arising from defined contribution plans are expensed as incurred. Defined benefit plans The Group’s net obligations are determined separately for each plan by estimating the present value of future benefits that employees have earned in the current and prior periods, and deducting the fair value of any plan assets. The present value of the defined benefit obligation is measured using actuarial techniques and actuarial assumptions that are unbiased and mutually compatible and attributes benefits to periods in which the obligation to provide post-employment benefits arise by using the Projected Unit Credit Method. The components of the defined benefit cost are recognized as follows: • • • the service costs are recognized in the consolidated income statement by function and presented in the relevant line items (cost of sales, selling, general and administrative costs, research and development costs, etc.); the net interest on the defined benefit liability is recognized in the consolidated income statement as net financial income /(expenses), and is determined by multiplying the net liability/(asset) by the discount rate used to discount obligations taking into account the effect of contributions and benefit payments made during the year; and the remeasurement components of the net obligations, which comprise actuarial gains and losses and any change in the effect of the asset ceiling are recognized immediately in other comprehensive income/(loss). These remeasurement components are not reclassified in the consolidated income statement in a subsequent period. Share-based compensation The Group has implemented an equity incentive plan that provides for the granting of share-based compensation to the Chief Executive Officer, all other members of the Group Executive Council (“GEC”) and key leaders. The equity incentive plan is accounted for in accordance with IFRS 2 - Share-based Payment, which requires the Company to recognize share-based compensation expense based on fair value of awards granted. Compensation expense for the equity-settled awards containing market performance conditions is measured at the grant date fair value of the award using the Monte Carlo simulation model, which requires the input of subjective assumptions, including the expected volatility of the Company’s common stock, the dividend yield, interest rates and a correlation coefficient between the common stock and the relevant market index. The fair value of the awards which are conditional only on a recipient’s continued service to the Company is measured using the share price at the grant date adjusted for the present value of future distributions which employees will not receive during the vesting period. Share-based compensation expense relating to the equity incentive plan is recognized over the service period within selling, general and administrative costs or cost of sales in the consolidated income statement depending on the function of the employee, with an offsetting increase to equity. Non-Executive Directors’ compensation settled in common shares of the Company is accounted for as equity-settled share-based compensation and measured at the fair value of the related compensation, which is recognized as an expense over the service period with an offsetting increase to equity. Provisions Provisions are recognized when the Group has a present obligation, legal or constructive, as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate of the amount of the obligation can be made. Warranty and recall campaigns provision All cars are sold with warranty coverage. The warranty coverage generally applies to defects that may become apparent within a certain period from the purchase of the car. The warranty provision is recognized at the time of the sale of the car, based on the present value of management’s estimate of the expected cost to fulfill the obligations over the contractual warranty period. Estimates are principally based on the Group’s historical claims or costs experience and the cost of parts and services to be incurred in the activities. The costs related to these provisions are recognized within cost of sales at the time when they are probable and reasonably estimable. Other long-term employee benefits Deferred income The Group’s obligations represent the present value of future benefits that employees have earned in return for their service during the current and prior periods. Remeasurement components on other long-term employee benefits are recognized in the consolidated income statement in the period in which they arise. Deferred income relates to amounts received by the Group under various agreements, which are reliant on the future performance of a service or other act of the Group. Deferred income is recognized as net revenues when the Group has fulfilled its obligations under the terms of the various agreements. 244 245 FINANCIAL STATEMENTS FERRARI N.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT DECEMBER 31, 2017 AND 2016 Range models (models belonging to the Ferrari product portfolio, excluding special series, limited edition and one-off (fuori serie) models) are sold with a scheduled maintenance program to ensure that the cars are maintained to the highest standards to meet the Group’s strict requirements for performance and safety. Amounts attributable to the maintenance program are not recognized as income immediately, but are deferred over the maintenance program term. The amount of the deferred income related to this program, is based on the estimated fair value of the service to be provided. Advances Advances relate to amounts received from or billed to customers in advance of having delivered the related cars or provided the related services. Revenue recognition Revenues from shipments of cars are recognized if it is probable that the economic benefits associated with a transaction will flow to the Group and the revenue can be reliably measured. Revenues are recognized when the risks and rewards of ownership are transferred to the Group’s dealers, the sales price is agreed or determinable and collectability is reasonably assured; for cars this generally corresponds to the date when the cars are released to the carrier responsible for transporting cars to dealers. Revenues are recognized net of discounts including but not limited to, sales incentives and performance based bonuses. Revenues from separately-priced extended warranty contracts are recognized over the contract period in proportion to the costs expected to be incurred based on historical information. A loss on these contracts is recognized if the sum of the expected costs for services under the contract exceeds unearned revenues. The Group offers a scheduled maintenance program on range models, which is not separately priced. The Group allocates revenue between the car and the maintenance program based on their relative estimated fair values. Amounts paid and attributed to the maintenance program are deferred and recognized as net revenues over the maintenance program period. Revenues from sponsorship and licensing agreements are recognized on a straight-line basis over the contract term. Certain of the sponsorship agreements contain performance related conditions while certain of the licensing agreements contain minimum guaranteed payments. Performance related sponsorship revenues and licensing revenues in excess of the minimum guaranteed payment are recognized when certain, which is typically when the related conditions have been achieved. Revenues also include operating lease rentals in conjunction with the rental of engines to other Formula 1 racing teams. Revenues from operating leases are recognized on a straight-line basis over the relevant term of the lease. Interest income earned in conjunction with the provision of client and dealer financing are reported within the line item “Finance income from financial services companies” using the effective interest rate method. Revenues from commercial activities relate to the revenues received from participating in the Formula 1 World Championship. The revenues attributable to each racing team are governed by a specific agreement and depend upon, among other factors, the prior year ranking of each of the racing teams. Revenues of the commercial activities are recognized pro-rata over the year. Cost of sales Cost of sales comprises expenses incurred in the manufacturing and distribution of cars and parts, including the engines rented to other Formula 1 racing teams, of which, cost of materials, components and labor costs are the most significant portion. The remaining costs principally include depreciation, amortization, insurance and transportation costs. Cost of sales also includes warranty and product-related costs, which are estimated and recorded at the time of sale of the car. Expenses which are directly attributable to the financial services companies, including the interest expenses related to their financing as a whole and provisions for risks and write-downs of assets, are also reported in cost of sales. Taxes Income taxes include all taxes based upon the taxable profits of the Group. Current and deferred taxes are recognized as income or expense and are included in the consolidated income statement for the period, except tax arising from (i) a transaction or event which is recognized, in the same or a different period, either in other comprehensive income/(loss) or directly in equity, or (ii) a business combination. Deferred taxes are accounted using the full liability method. Deferred tax liabilities are recognized for all taxable temporary differences between the carrying amounts of assets or liabilities and their tax base, except to the extent that the deferred tax liabilities arise from the initial recognition of goodwill or the initial recognition of an asset or liability in a transaction which is not a business combination and at the time of the transaction, affects neither accounting profit nor taxable profit. Deferred tax assets are recognized for all deductible temporary differences to the extent that it is probable that taxable profit will be available against which the deductible temporary differences can be utilized, unless the deferred tax assets arise from the initial recognition of an asset or liability in a transaction that is not a business combination and at the time of the transaction, affects neither accounting profit nor taxable profit. Deferred tax assets and liabilities are measured at the substantively enacted tax rates in the respective jurisdictions in which the Group operates that are expected to apply to the period when the asset is realized or liability is settled. Any remeasurements to deferred tax assets and liabilities as a result of changes in substantially enacted tax rates are recognized in the income statement. The recoverability of deferred tax assets is dependent on the Group’s ability to generate sufficient future taxable income in the period in which it is assumed that the deductible temporary differences reverse and tax losses carried forward can be utilized. In making this assessment, the Group considers future taxable income arising on the most recent budgets and plans, prepared by using the same criteria described for testing the impairment of assets and goodwill, moreover, it estimates the impact of the reversal of taxable temporary differences on earnings and it also considers the period over which these assets could be recovered. The carrying amount of deferred tax assets is reduced to the extent that it is not probable that sufficient taxable profit will be available to allow the benefit of part or all of the deferred tax assets to be utilized. 246 247 FINANCIAL STATEMENTS FERRARI N.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT DECEMBER 31, 2017 AND 2016 The Group recognizes deferred tax liabilities associated with the existence of a subsidiary’s undistributed profits, except when it is able to control the timing of the reversal of the temporary difference; and it is probable that this temporary difference will not reverse in the foreseeable future. The Group recognizes deferred tax assets associated with the deductible temporary differences on investments in subsidiaries only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary difference can be utilized. Deferred tax assets relating to the carry-forward of unused tax losses and tax credits, as well as those arising from deductible temporary differences, are recognized to the extent that it is probable that future profits will be available against which they can be utilized. Current income taxes and deferred taxes are offset when they relate to the same taxation authority and there is a legally enforceable right of offset. Italian Regional Income Tax (“IRAP”) is recognized within income tax expense. IRAP is calculated on a measure of income defined by the Italian Civil Code as the difference between operating revenues and costs, before financial income and expense, and in particular before the cost of fixed-term employees, credit losses and any interest included in lease payments. IRAP is applied on the tax base at 3.9 percent for the years ended December 31, 2017, 2016 and 2015. Other taxes not based on income, such as property taxes and capital taxes, are included in other expenses/(income), net. Dividends Dividends payable by the Group are reported as a change in equity in the period in which they are approved by shareholders or the Board of Directors as applicable under local rules and regulations. Rounding of amounts All amounts disclosed in the financial statements and notes have been rounded off to the nearest thousand Euro unless otherwise stated. 3. SCOPE OF CONSOLIDATION Ferrari N.V. is the parent company of the Group and it holds, directly and indirectly, interests in the Group’s main operating companies. The Group’s scope of consolidation at December 31, 2017 and 2016 was as follows: Name Country Nature of business At December 31, 2017 At December 31, 2016 Shares held by the Group Shares held by NCI Shares held by the Group Shares held by NCI Directly held interests Ferrari S.p.A. Indirectly held through Ferrari S.p.A. Italy Manufacturing 100% —% 100% —% Ferrari North America Inc. Ferrari Japan KK USA Japan Importer and distributor 100% Importer and distributor 100% Ferrari Australasia Pty Limited Australia Importer and distributor 100% Ferrari (HK) Limited Hong Kong Importer and distributor 100% —% —% —% —% 100 % 100 % 100 % 100 % —% —% —% —% Ferrari International Cars Trading (Shanghai) Co. L.t.d. China Importer and distributor 80% 20% 80 % 20% Ferrari Far East Pte Limited Singapore Service company Ferrari Management Consulting (Shanghai) Co. L.t.d. China Service company Ferrari South West Europe S.a.r.l. France Service company Ferrari Central East Europe GmbH Germany Service company G.S.A. S.A. Switzerland Service company Ferrari North Europe Limited (1) Mugello Circuit S.p.A. Ferrari Financial Services S.p.A. UK Italy Italy Service company Racetrack management Financial services Indirectly held through other Group entities Ferrari Financial Services Inc. (2) Ferrari Auto Securitization Transaction, LLC (3) Ferrari Auto Securitization Transaction - Lease, LLC (3) Ferrari Auto Securitization Transaction - Select, LLC (3) Ferrari Financial Services Titling Trust (3) 410, Park Display Inc. (4) USA USA USA USA USA USA Financial services Financial services Financial services 100% Financial services 100% Financial services Retail 100% 100% 100% 100% 100% 100% 100% n.a. 100% 100% 100% 100% —% —% —% —% —% n.a. —% —% —% —% —% —% —% —% 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100% 100% 100% 100% 100% 100% —% —% —% —% —% —% —% —% —% —% —% —% —% — 248 249 (1) On June 30, 2017, the liquidation process of Ferrari North Europe Limited was completed (2) Shareholding held by Ferrari Financial Services S.p.A. (3) Shareholding held by Ferrari Financial Services Inc. (“FFS Inc”). (4) Shareholding held by Ferrari North America Inc. FINANCIAL STATEMENTS FERRARI N.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT DECEMBER 31, 2017 AND 2016 On April 30, 2016, the liquidation process of Ferrari Financial Services Japan KK was completed. At December 31, 2015 Ferrari Financial Services Japan KK was a wholly owned subsidiary. any adverse impacts on its ability to meet liquidity requirements. Cash held in China at December 31, 2017 amounted to €66,456 thousand (€47,555 thousand at December 31, 2016). Ferrari Financial Services GmbH (“FFS GmbH”) was a subsidiary of the Group until November 7, 2016 when the Group sold a majority stake in FFS GmbH to FCA bank. Upon completion of the transaction, FFS GmbH was deconsolidated and the 49.9 percent interest in FFS GmbH retained by the Group was accounted for using the equity method. See Note 17. As permitted by IFRS, certain subsidiaries (mainly dormant companies or entities with insignificant operations) are excluded from consolidation on a line-by-line basis and are accounted for at cost. Their aggregate assets and revenues represent less than 1 percent of the Group’s respective amounts for each period and at each date presented by these Consolidated Financial Statements. Cash collected from the settlement of receivables or lines of credit pledged as collateral is subject to certain restrictions regarding its use and is principally applied to repay principal and interest of the funding. Such cash amounted to €28,230 thousand at December 31, 2017 (€19,411 thousand at December 31, 2016). Segment reporting The Group has determined that it has one operating and one reportable segment based on the information reviewed by its CODM in making decisions regarding allocation of resources and to assess performance. Non-controlling interests Use of estimates The non-controlling interests at December 31, 2017 and 2016 relate to Ferrari International Cars Trading (Shanghai) Co. L.t.d. (“FICTS”), in which the Group holds an 80 percent interest. The net profit attributable to non-controlling interests for the years ended December 31, 2017, 2016 and 2015 relates to the non-controlling interest in FICTS and for the year ended December 31, 2015 also the non-controlling interest in Ferrari Financial Services S.p.A.: The Consolidated Financial Statements are prepared in accordance with IFRS which require the use of estimates, judgments and assumptions that affect the carrying amount of assets and liabilities, the disclosure of contingent assets and liabilities and the amounts of income and expenses recognized. The estimates and associated assumptions are based on elements that are known when the financial statements are prepared, on historical experience and on any other factors that are considered to be relevant. Equity attributable to non-controlling interests - FICTS Net profit attributable to non-controlling interests Of which attributable to FICTS Of which attributable to Ferrari Financial Services S.p.A At December 31, 2017 2016 (€ thousand) 5,258 4,810 For the years ended December 31, 2015 2016 2017 (€ thousand) 2,003 2,003 — 956 956 — 2,238 1,351 887 In July 2015 the Group acquired the remaining 10 percent of non-controlling interest of its subsidiary Ferrari Financial Services S.p.A. from Aldasa GmbH, and as a result from such date the Group owns 100 percent of the share capital of Ferrari Financial Services S.p.A. The non-controlling interests in FICTS and Ferrari Financial Services S.p.A. are not considered to be significant to the Group for the relevant periods. Restrictions The Group may be subject to restrictions which limit its ability to use cash in relation to its interest in FICTS. In particular, cash held in China is subject to certain repatriation restrictions (and may only be repatriated as dividends). Based on the Group’s review, it does not believe that such transfer restrictions have The estimates and underlying assumptions are reviewed periodically and continuously by the Group. If the items subject to estimates do not perform as assumed, then the actual results could differ from the estimates, which would require adjustment accordingly. The effects of any changes in estimate are recognized in the consolidated income statement in the period in which the adjustment is made, or prospectively in future periods. The items requiring estimates for which there is a risk that a material difference may arise in respect of the carrying amounts of assets and liabilities in the future are discussed below. Recoverability of non-current assets with definite useful lives Non-current assets with definite useful lives include property, plant and equipment and intangible assets. Intangible assets with definite useful lives mainly consist of capitalized development costs. The Group periodically reviews the carrying amount of non-current assets with definite useful lives when events and circumstances indicate that an asset may be impaired. Impairment tests are performed by comparing the carrying amount and the recoverable amount of the cash-generating unit (“CGU”). The recoverable amount is the higher of the CGU’s fair value less costs of disposal and its value in use. In assessing the value in use, the estimated future cash flows are discounted to their present value using a pre- tax discount rate that reflects current market assessments of the time value of money and the risks specific to the CGU. For the period covered by these Consolidated Financial Statements, the Group has not recognized any impairment charges for non-current assets with definite useful lives. 250 251 FINANCIAL STATEMENTS FERRARI N.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT DECEMBER 31, 2017 AND 2016 Recoverability of goodwill The Group’s goodwill at December 31, 2017 amounted to €785,182 thousand and primarily relates to the Separation, as a result of which the Company recorded goodwill of €780,542 thousand reflecting FCA’s recorded goodwill relating to Ferrari S.p.A. In accordance with IAS 36 - Impairment of Assets, goodwill is not amortized and is tested for impairment annually or more frequently if facts or circumstances indicate that the asset may be impaired. As the Group is composed of one operating segment, goodwill is tested at the Group level, which represents the lowest level within the Group at which goodwill is monitored for internal management purposes in accordance with IAS 36. The impairment test is performed by comparing the carrying amount (which mainly comprises property, plant and equipment, goodwill and capitalized development costs) and the recoverable amount of the CGU. The recoverable amount of the CGU is the higher of its fair value less costs of disposal and its value in use. Development costs Development costs are capitalized if the conditions under IAS 38 - Intangible Assets have been met. The starting point for capitalization is based upon the technological and commercial feasibility of the project, which is usually when a product development project has reached a defined milestone according to the Group’s established product development model. Feasibility is based on management’s judgment which is formed on the basis of estimated future cash flows. Capitalization ceases and amortization of capitalized development costs begins on start of production of the relevant project. The amortization of development costs requires management to estimate the lifecycle of the related model. Any changes in such assumptions would impact the amortization charge recorded and the carrying amount of capitalized development costs. The periodic amortization charge is derived after determining the expected lifecycle of the related model and, if applicable any expected residual value at the end of its life. Increasing an asset’s expected lifecycle or its residual value would result in a reduced amortization charge in the consolidated income statement. The useful lives and residual values of the Group’s models are determined by management at the time of capitalization and reviewed annually for appropriateness and recoverability. The lives are based on historical experience with similar assets as well as anticipation of future events which may impact their life such as changes in technology. Historically changes in useful lives and residual values have not resulted in material changes to the Group’s amortization charge or estimated recoverability of the related assets. car is sold. The reserve for product warranties includes the expected costs of warranty obligations imposed by law or contract, as well as the expected costs for policy coverage. The estimated future costs of these actions are principally based on assumptions regarding the lifetime warranty costs of each car line and each model year of that car line, as well as historical claims experience for the Group’s cars. In addition, the number and magnitude of additional service actions expected to be approved, and policies related to additional service actions, are taken into consideration. Due to the uncertainty and potential volatility of these estimated factors, changes in the assumptions used could materially affect the results of operations. The Group periodically initiates voluntary service actions to address various client satisfaction, safety and emissions issues related to cars sold. Included in the reserve is the estimated cost of these services and recall actions. The estimated future costs of these actions are based primarily on historical claims experience for the Group’s cars and the cost of parts and services to be incurred in the specified activities, and are recognized at the time when they are probable and reasonably estimable. Estimates of the future costs of these actions are inevitably imprecise due to several uncertainties, including the number of cars affected by a service or recall action. It is reasonably possible that the ultimate cost of these service and recall actions may require the Group to make expenditures in excess of (or less than) established reserves over an extended period of time. The estimate of warranty and additional service obligations is periodically reviewed during the year. In addition, the Group makes provisions for estimated product liability costs arising from property damage and personal injuries including wrongful death, and potential exemplary or punitive damages alleged to be the result of product defects. By nature, these costs can be infrequent, difficult to predict, and have the potential to vary significantly in amount. Costs associated with these provisions are recorded in the consolidated income statement and any subsequent adjustments are recorded in the period in which the adjustment is determined. Share-based compensation The Group accounts for its equity incentive plan in accordance with IFRS 2 - Share-based Payment, which requires the recognition of share-based compensation expense based on the fair value of the awards granted. Share-based compensation for equity-settled awards containing market performance conditions is measured at the grant date of the awards using the Monte Carlo simulation model, which requires the input of subjective assumptions, including the expected volatility of our common stock, the dividend yield, interest rates and the correlation coefficient between our common stock and the relevant market index. The probability that the Group will achieve a certain level of Total Shareholder Return performance compared to the defined peer group is also considered. As a result, at the grant date management is required to make key assumptions and estimates regarding conditions that will occur in the future, which inherently involves uncertainty. Therefore, the amount of share-based compensation recognized has been effected by the significant assumptions and estimates used. For the year ended December 31, 2017, the Group capitalized development costs of €185,115 thousand Other contingent liabilities (€141,396 thousand for the year ended December 31, 2016). Product warranties liabilities The Group establishes reserves for product warranties at the time the sale is recognized. The Group issues various types of product warranties under which the performance of products delivered is generally guaranteed for a certain period or term, which is generally defined by the legislation in the country where the The Group makes provisions in connection with pending or threatened disputes or legal proceedings when it is considered probable that there will be an outflow of funds and when the amount can be reasonably estimated. If an outflow of funds becomes possible but the amount cannot be estimated, the matter is disclosed in the notes to the Consolidated Financial Statements. The Group is the subject of legal and tax proceedings covering a wide range of matters in various jurisdictions. Due to the uncertainty inherent in such matters, it is difficult to predict the outflow of funds that could result from such disputes with any certainty. 252 253 FINANCIAL STATEMENTS FERRARI N.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT DECEMBER 31, 2017 AND 2016 Moreover, the cases and claims against the Group often derive from complex legal issues which are subject to a differing degree of uncertainty, including the facts and circumstances of each particular case and the manner in which applicable law is likely to be interpreted and applied to such fact and circumstances, and the jurisdiction and the different laws involved. The Group monitors the status of pending legal proceedings and consults with experts on legal and tax matters on a regular basis. It is therefore possible that the provisions for the Group’s legal proceedings and litigation may vary as the result of future developments in pending matters. Litigation Various legal proceedings, claims and governmental investigations are pending against the Group on a wide range of topics, including car safety, emissions and fuel economy, early warning reporting, dealer, supplier and other contractual relationships, intellectual property rights and product warranties matters. Some of these proceedings allege defects in specific component parts or systems (including airbags, seatbelts, brakes, transmissions, engines and fuel systems) in various car models or allege general design defects relating to car handling and stability, sudden unintended movement or crashworthiness. These proceedings seek recovery for damage to property, personal injuries or wrongful death and in some cases could include a claim for exemplary or punitive damages. Adverse decisions in one or more of these proceedings could require the Group to pay substantial damages, or undertake service actions, recall campaigns or other costly actions. Litigation is subject to many uncertainties, and the outcome of individual matters is not predictable with assurance. An accrual is established in connection with pending or threatened litigation if a loss is probable and a reliable estimate can be made. Since these accruals represent estimates, it is reasonably possible that the resolution of some of these matters could require the Group to make payments in excess of the amounts accrued. It is also reasonably possible that the resolution of some of the matters for which accruals could not be made may require the Group to make payments in an amount or range of amounts that could not be reasonably estimated. The term “reasonably possible” is used herein to mean that the chance of a future transaction or event occurring is more than remote but less than probable. Although the final resolution of any such matters could have a material effect on the Group’s operating results for the particular reporting period in which an adjustment of the estimated reserve is recorded, it is believed that any resulting adjustment would not materially affect the consolidated financial position of the Group. 4. NET REVENUES Net revenues are as follows: Cars and spare parts Engines Sponsorship, commercial and brand Other Total net revenues For the years ended December 31, 2016 2017 (€ thousand) 2015 2,455,955 2,180,045 2,080,228 373,313 494,082 93,540 337,924 488,514 98,601 218,657 441,128 114,356 3,416,890 3,105,084 2,854,369 Other net revenues primarily include interest income generated by financial service activities and net revenues from the management of the Mugello racetrack. 5. COST OF SALES Cost of sales in 2017, 2016 and 2015 amounted to €1,650,860 thousand, €1,579,690 thousand and €1,498,806 thousand, respectively, comprising mainly of expenses incurred in the manufacturing and distribution of cars and spare parts, including the engines sold to Maserati and engines rented to other Formula 1 racing teams, of which the cost of materials, components and labor are the most significant elements. The remaining costs principally include depreciation, amortization, insurance and transportation costs. Cost of sales also includes warranty and product-related costs, which are estimated and recorded at the time of shipment of the car. Cost of sales in 2016 included €36,994 thousand related to the charges for Takata airbag inflator recalls. See Note 24 “Provisions” for additional details. Interest and other financial expenses from financial services companies included within cost of sales in 2017, 2016 and 2015 amounted to €30,945 thousand, €21,307 thousand and €23,702 thousand, respectively. 6. SELLING, GENERAL AND ADMINISTRATIVE COSTS General and administrative costs in 2017, 2016 and 2015 amounted to €155,581 thousand, €148,812 thousand and €174,451 thousand, respectively, and mainly consist of administration expenses and other general expenses that are not directly attributable to sales, manufacturing or research and development functions. In 2015, general and administrative costs include €15,789 thousand in costs related to the initial public offering process and €19,106 thousand related to the one off extra bonus paid to employees for the initial public offering. Selling costs in 2017, 2016 and 2015 amounted to €173,484 thousand, €146,430 thousand and €164,175 thousand, respectively, and mainly consist of costs for marketing and events, sales personnel, and retail stores. Marketing and events expenses consist primarily of costs in connection with trade and auto shows, media and client events for the launch of new models as well as sponsorship and indirect marketing costs incurred through the Formula 1 racing team, Scuderia Ferrari. 7. RESEARCH AND DEVELOPMENT COSTS Research and development costs are as follows: Research and development costs expensed during the year Amortization of capitalized development costs Total research and development costs For the years ended December 31, 2016 2017 (€ thousand) 2015 556,617 100,502 657,119 509,580 104,055 613,635 446,726 114,856 561,582 The main component of research and development costs expensed during the period relate to research and development expenses to support the innovation of our product range and components, in particular, in relation to hybrid technology and Formula 1 developments. Research and development costs also include amortization of capitalized development costs. 254 255 FINANCIAL STATEMENTS FERRARI N.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT DECEMBER 31, 2017 AND 2016 In 2016, the U.S. National Highway Traffic Safety Administration (“NHTSA”) published new Visual- Manual Driver Distraction Phase II draft guidelines. These guidelines focus, among other things, on the need to modify the design of car devices and other driver interfaces to minimize driver distraction. The Group is evaluating these guidelines and their potential impact on the Group’s results of operations and financial position and determining what steps and/or countermeasures, if any, the Group will need to make. 8. OTHER EXPENSES, NET Other expenses, net are as follows: Other expenses Other income Other expenses, net For the years ended December 31, 2015 2016 2017 (€ thousand) 11,830 (4,963) 6,867 30,249 (5,748) 24,501 33,137 (22,102) 11,035 Other expenses in 2017 include €5,593 thousand related to indirect taxes and €6,237 thousand related to miscellaneous expenses. Other income in 2017 includes €2,585 thousand of gain on the disposal of property plant and equipment, €1,747 thousand related to rental income and €631 thousand related to miscellaneous income. Other expenses in 2016 include €15,469 thousand related to provisions, primarily related to disputes with a distributor, €5,628 thousand related to indirect taxes and €9,152 thousand related to miscellaneous expenses. Other income in 2016 includes €2,903 thousand of gain on the disposal of property plant and equipment, €1,569 thousand related to rental income and €1,276 thousand related to miscellaneous income. Other expenses in 2015 include €12,933 thousand related to provisions, of which €8,822 thousand related to legal proceedings and disputes and €4,111 thousand primarily related to disputes with suppliers, employees and other parties relating to contracts. The most significant accruals to the provision for legal proceedings and disputes recognized in 2015 relate to litigation with a former distributor. Other income in 2015 includes €5,802 thousand for the gain on the sale of a group of assets related to the investment properties in Modena, Italy, which the Group sold to the tenant, Maserati S.p.A., an FCA Group company. The total sale price (as determined by an independent valuation) amounted to €37,130 thousand and was received in the third quarter of 2015. At the transaction date the net book value of the assets and liabilities disposed of was €31,328 thousand. 9. RESULT FROM INVESTMENTS Result from investments of €2,437 thousand in 2017 related to the Group’s proportionate share of FFS GmbH’s net profit. Result from investments of €3,066 thousand in 2016 includes €660 thousand related to the gain on the sale of a majority stake in FFS GmbH to FCA Bank on November 7, 2016, €1,489 thousand related to the gain on the fair value measurement of the non-controlling interest retained in FFS GmbH and €917 thousand related to the Group’s proportionate share of FFS GmbH’s net profit for the period from November 7, 2016 to December 31, 2016. See Note 17 for additional details. 10. NET FINANCIAL EXPENSES The following table sets out details of financial income and expenses, including the amounts reported in the consolidated income statement within the net financial expenses line item, as well as interest income from financial services activities, recognized under net revenues, and interest expenses and other financial charges from financial services activities, recognized under cost of sales. Financial income: Interest income from bank deposits Other interest income and financial income Interest income and other financial income Finance income from financial services companies Total financial income Total financial income relating to: Industrial companies (A) Financial services companies (reported in net revenues) Financial expenses: Interest expenses on financial liabilities with FCA Group Capitalized borrowing costs Other interest cost and financial expenses Interest expenses and other financial expenses Interest expenses from banks Interest on bonds Write-downs of financial receivables Net interest expenses on employee benefits provisions Other financial expenses Total financial expenses Net expenses from derivative financial instruments and foreign currency exchange rate differences Total financial expenses and net expenses from derivative financial instruments and foreign currency exchange rate differences Total financial expenses and net expenses from derivative financial instruments and foreign currency exchange rate differences relating to: Industrial companies (B) Financial services companies (reported in cost of sales) For the years ended December 31, 2015 2016 (€ thousand) 2017 1,153 5,284 6,437 50,254 56,691 6,437 50,254 — 1,578 (3,775) (2,197) (23,057) (9,231) (3,530) — (12,008) (50,023) 843 1,841 2,684 58,236 60,920 2,684 58,236 — 1,519 (4,090) (2,571) (27,042) (6,937) (3,864) (389) (5,831) (46,634) 54 6,473 6,527 61,587 68,114 6,527 61,587 (15,745) 1,530 (3,163) (17,378) (3,357) — (9,607) (79) (5,029) (35,450) (16,619) (5,086) (4,930) (66,642) (51,720) (40,380) (35,697) (30,945) (30,413) (21,307) (16,678) (23,702) Net financial expenses relating to industrial companies (A+B) (29,260) (27,729) (10,151) 256 257 FINANCIAL STATEMENTS FERRARI N.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT DECEMBER 31, 2017 AND 2016 Interest expenses from banks for the year ended December 31, 2017 and 2016 includes interest expenses on the Term Loan, which was fully repaid in November 2017, and for the year ended December 31, 2016 also includes interest expenses on the Bridge Loan, which was fully repaid in March 2016. Interest expenses from banks for all years presented also includes interest expenses related to financial services activities, which are reported within cost of sales, as well as interest expenses on other bank borrowings. Interest on bonds includes interest expenses on the bonds issued in November 2017 (“2021 Bond”) and March 2016 (“2023 Bond”). See Note 25 “Debt” for additional details. Financial income for the year ended December 31, 2017 includes amounts recognized in relation to the Delta Topco option and a gain on the fair value measurement of the Series C Liberty Formula One shares (“Liberty Shares”) subsequent to initial recognition at cost. Interest expenses on financial liabilities with FCA Group for the year ended December 31, 2015 included €9,333 thousand related to the FCA Note. 11. INCOME TAXES Income tax expense is as follows: Current tax expense Deferred tax expense/(income) Taxes relating to prior periods Total income tax expense For the years ended December 31, 2017 201,274 8,718 (1,232) 208,760 2016 (€ thousand) 2015 189,492 (18,290) (3,567) 167,635 153,739 (9,410) (214) 144,115 The reconciliation between actual income tax expense and the theoretical income tax expense, calculated on the basis of the theoretical tax rates in effect in Italy, is as follows: For the years ended December 31, 2017 2016 (€ thousand) 2015 179,077 156,022 119,396 (7,061) 4,862 2,344 (1,232) 2,420 (10,219) 1,280 853 (3,567) 2,017 5,846 4,005 1,631 (214) (384) 180,410 146,386 130,280 24.2% 28,350 25.8% 21,249 208,760 167,635 30.0% 13,835 144,115 Theoretical income tax expense, net of IRAP Tax effect on: Permanent differences Effect of changes in tax rate and tax regulations Differences between foreign tax rates and the theoretical Italian tax rate and tax holidays Taxes relating to prior years Withholding tax on earnings Total income tax expense, net of IRAP Effective tax rate, net of IRAP IRAP (current and deferred) Total income tax expense 258 Theoretical income taxes have been calculated at the corporate income tax rate in Italy for the respective years, which was 24.0 percent for the year ended December 31, 2017 and 27.5 percent for the years ended December 31, 2016 and 2015. During 2015 a change in Italian tax law approved a reduction in the corporate income tax rate from 27.5 percent to 24.0 percent, effective from 2017. In order to facilitate the understanding of the tax rate reconciliation presented above, income tax expense has been presented net of Italian Regional Income Tax (“IRAP”). IRAP is calculated on a measure of income defined by the Italian Civil Code as the difference between operating revenues and costs, before financial income and expense, and in particular before the cost of fixed-term employees, credit losses and any interest included in lease payments. IRAP is applied on the tax base at 3.9 percent for each of the years ended December 31, 2017, 2016 and 2015. The decrease in the effective tax rate net of IRAP from 25.8 percent in 2016 to 24.2 percent in 2017 was primarily attributable to the combined effects of a reduction in the Italian corporate income tax rate from 27.5 percent to 24.0 percent (effective from 2017), deductions related to eligible research and development costs and depreciation of fixed assets in accordance with tax regulations in Italy, partially offset by a decrease in net deferred tax assets due to the Tax Cuts and Jobs Act that was enacted into law in the U.S. The Tax Cuts and Jobs Act (the “Tax Act”) was enacted into law in the U.S. on December 22, 2017. The Tax Act includes various changes to the tax law, including a reduction in the corporate income tax rate from 35% to 21% effective January 1, 2018. The Group recognized the effects of the changes in the tax rate and laws resulting from the Tax Act in 2017, which resulted in a €4,646 thousand decrease in net deferred tax assets, recorded through the income statement, related to adjusting deferred tax assets and liabilities to reflect the new corporate tax rate. The accounting for the effects of the rate change on deferred tax balances is complete and no provisional amounts were recorded for this item. The decrease in the effective tax rate net of IRAP from 30.0 percent in 2015 to 25.8 percent in 2016 was primarily attributable to the combined effects of the previously mentioned adjustments to deferred taxes due to the reduction in the Italian corporate income tax rate and additional tax deductions in 2016 on eligible research and development costs and on investments and other expenses, in accordance with changes in tax regulations in Italy. The analysis of deferred tax assets and deferred tax liabilities at December 31, 2017 and 2016, is as follows: Deferred tax assets: To be recovered after 12 months To be recovered within 12 months Deferred tax liabilities: To be realized after 12 months To be realized within 12 months Net deferred tax assets At December 31, 2017 2016 (€ thousand) 63,286 30,805 94,091 (9,885) (1,092) (10,977) 83,114 72,142 47,215 119,357 (10,517) (2,594) (13,111) 106,246 259 FINANCIAL STATEMENTS FERRARI N.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT DECEMBER 31, 2017 AND 2016 The movements in deferred income tax assets and liabilities during the year, without taking into consideration the offsetting of balances within the same tax jurisdiction, are as follows: At December 31, 2016 Recognized in consolidated income statement Charged to equity (€ thousand) Translation differences and other changes At December 31, 2017 Deferred tax assets arising on: Provisions Deferred income Employee benefits Cash flow hedge reserve Foreign currency exchange rate differences Inventory obsolescence Allowances for doubtful accounts Depreciation Other Total deferred tax assets Deferred tax liabilities arising on: 111,321 43,549 2,370 7,325 3,028 24,569 4,107 19,853 13,833 229,955 (6,959) 2,649 (11) — (2,288) 13,515 (94) (3,283) 2,007 5,536 Depreciation (17,592) 7,408 Capitalization of development costs (90,480) (24,295) Employee benefits Exchange rate differences Cash flow hedge reserve Lease accounting Withholding tax on undistributed earnings (1,745) (3,547) (1) (11,004) (1,150) (123) 2,900 — 352 1,150 Total deferred tax liabilities (125,519) (12,608) Deferred tax asset arising on tax loss carry-forward 1,810 (1,646) — — 203 (9,757) — — — — — (9,554) — — — — — — — — — (2,119) 102,243 — — — — (469) (14) — (3,457) (6,059) 46,198 2,562 (2,432) 740 37,615 3,999 16,570 12,383 219,878 1,254 (8,930) — — — — — — (114,775) (1,868) (647) (1) (10,652) — 1,254 (136,873) (55) 109 Total net deferred tax assets 106,246 (8,718) (9,554) (4,860) 83,114 At December 31, 2015 Recognized in consolidated income statement Charged to equity Changes in the scope of consolidation Translation differences and other changes At December 31, 2016 (€ thousand) Deferred tax assets arising on: Provisions Deferred income Employee benefits Cash flow hedge reserve Foreign currency exchange rate differences Inventory obsolescence Allowances for doubtful accounts Depreciation Other 77,915 39,318 2,242 24,267 343 25,075 3,633 21,682 10,838 Total deferred tax assets 205,313 Deferred tax liabilities arising on: Depreciation Capitalization of development costs Employee benefits Exchange rate differences Cash flow hedge reserve Lease accounting Withholding tax on undistributed earnings Total deferred tax liabilities Deferred tax asset arising on tax loss carry-forward Total net deferred tax assets (14,571) (79,531) (1,713) (1,970) (1) (11,457) (1,150) 29,461 4,231 (54) — 2,685 (626) 485 (1,783) (1,808) 32,591 (2,591) (10,949) (32) (1,577) — 453 — — — (18) (16,943) — — — — — (16,961) — — — — — — — — — (78) 4,023 111,321 — — — — — — — 6,989 6,911 — — — — — — — — — 200 1 — 120 (11) (46) (2,186) 43,549 2,370 7,325 3,028 24,569 4,107 19,853 13,833 2,101 229,955 (430) (17,592) — — — — — — (90,480) (1,745) (3,547) (1) (11,004) (1,150) (430) (125,519) (2,949) 7 1,810 (110,393) (14,696) 4,357 395 99,277 18,290 (16,961) 3,962 1,678 106,246 The decision to recognize deferred tax assets is made for each company in the Group by assessing whether the conditions exist for the future recoverability of such assets by taking into account the basis of the most recent forecasts from budgets and business plans. Deferred taxes on the undistributed earnings of subsidiaries have not been recognized, except in cases where it is probable the distribution will occur in the foreseeable future. Starting in 2016 following the completion of the Separation, the Group’s entities participate in a group Italian tax consolidation under Ferrari N.V. Previously, the Group participated in the FCA Group Italian tax consolidation. 260 261 FINANCIAL STATEMENTS FERRARI N.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT DECEMBER 31, 2017 AND 2016 12. OTHER INFORMATION BY NATURE 14. GOODWILL Personnel costs in 2017, 2016 and 2015 amounted to €305,584 thousand, €294,047 thousand and €284,947 thousand, respectively. These amounts include costs that were capitalized mainly in connection to product development activities. In 2017, 2016 and 2015 the Group had an average number of employees of 3,336, 3,115 and 2,954, respectively. 13. EARNINGS PER SHARE For the purpose of calculating earnings per share for the year ended December 31, 2015, the weighted average number of common shares outstanding retrospectively reflects the effects of the Separation. Basic earnings per share Basic earnings per share is calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of common shares in issue. The following table provides the amounts used in the calculation of basic earnings per share for the years ended December 31, 2017, 2016 and 2015: Profit attributable to owners of the Company € thousand Weighted average number of common shares thousand Basic earnings per common share € Diluted earnings per share For the years ended December 31, 2017 2016 2015 535,393 188,951 2.83 398,762 188,923 2.11 287,816 188,923 1.52 For the year ended December 31, 2017 the weighted average number of common shares for diluted earnings per share was increased to take into consideration the theoretical effect of (i) the potential common shares that would be issued under the equity incentive plan (see Note 22 for additional details of the equity incentive plan) and (ii) the potential common shares that would have been issued for the Non-Executive Directors’ compensation agreement. For the year ended December 31, 2016 the weighted average number of common shares for diluted earnings per share was increased to take into consideration the theoretical effect of the potential common shares that would have been issued for the Non-Executive Directors’ compensation agreement. For the year ended December 31, 2015 there were no potentially dilutive instruments. The following table provides the amounts used in the calculation of diluted earnings per share for the years ended December 31, 2017, 2016 and 2015: Profit attributable to owners of the Company € thousand 535,393 398,762 287,816 Weighted average number of common shares for diluted thousand earnings per common share 189,759 188,946 188,923 Diluted earnings per common share € 2.82 2.11 1.52 For the years ended December 31, 2017 2016 2015 At December 31, 2017 and 2016 goodwill amounted to €785,182 thousand. In accordance with IAS 36, goodwill is not amortized and is tested for impairment annually, or more frequently if facts or circumstances indicate that the asset may be impaired. Impairment testing is performed by comparing the carrying amount and the recoverable amount of the CGU. The recoverable amount of the CGU is the higher of its fair value less costs of disposal and its value in use. The assumptions used in this process represent management’s best estimate for the period under consideration. The estimate of the value in use of the CGU for purposes of performing the annual impairment test was based on the following assumptions: • The expected future cash flows covering the period from 2018 through 2022 have been derived from the Ferrari business plan. In particular the estimate considers expected EBITDA adjusted to reflect the expected capital expenditure. These cash flows relate to the CGU in its condition when preparing the financial statements and exclude the estimated cash flows that might arise from restructuring plans or other structural changes. Volumes and sales mix used for estimating the future cash flows are based on assumptions that are considered reasonable and sustainable and represent the best estimate of expected conditions regarding market trends for the CGU over the period considered. • The expected future cash flows include a normalized terminal period used to estimate the future results beyond the time period explicitly considered, which were calculated by using the specific medium/long-term growth rate for the sector equal to 2.0 percent in 2017 (2.0 percent in 2016 and 2.1 percent in 2015). • The expected future cash flows have been estimated in Euro, and discounted using a post-tax discount rate appropriate for that currency, determined by using a base WACC of 7.0 percent in 2017 (7.0 percent in 2016 and 7.6 percent in 2015). The WACC used reflects the current market assessment of the time value of money for the period being considered and the risks specific to the CGU under consideration. The recoverable amount of the CGU was significantly higher than its carrying amount. Furthermore, the exclusivity of the business, its historical profitability and its future earnings prospects indicate that the carrying amount of the goodwill will continue to be recoverable, even in the event of difficult economic and market conditions. 262 263 FINANCIAL STATEMENTS FERRARI N.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT DECEMBER 31, 2017 AND 2016 15. INTANGIBLE ASSETS Externally acquired development costs Development costs internally generated Patents, concessions and licenses Other intangible assets Total (€ thousand) Gross carrying amount at January 1, 2016 834,483 437,254 131,237 45,470 1,448,444 Additions Reclassification Change in scope of consolidation Translation differences 104,009 37,387 — — — — — — 12,110 4,369 (3,458) (66) 12,834 (4,369) — (93) 166,340 — (3,458) (159) Balance at December 31, 2016 938,492 474,641 144,192 53,842 1,611,167 Additions Reclassification Translation differences 142,795 42,320 — — — — 12,416 12,289 (1,011) 4,975 202,506 (12,289) — (1,443) (2,454) Balance at December 31, 2017 1,081,287 516,961 167,886 45,085 1,811,219 16. PROPERTY, PLANT AND EQUIPMENT Land Industrial buildings Plant, machinery and equipment Other assets Advances and assets under construction (€ thousand) Total Gross carrying amount at January 1, 2016 22,671 331,177 1,691,482 131,627 35,763 2,212,720 Additions Divestitures Reclassification Change in scope of consolidation Translation differences — — — — 10 5,596 81,678 7,322 81,051 175,647 (1,021) (9,902) (7,631) — (18,554) 1,578 22,898 — 173 — — 1,441 (613) 476 (28,341) (2,424) — — (613) 659 Balance at December 31, 2016 22,681 337,503 1,786,156 132,622 88,473 2,367,435 Additions Divestitures Reclassification Translation differences 892 4,691 131,981 11,855 39,485 188,904 — — (36) (77) 355 (723) (31,877) (3,101) (368) (35,423) 73,160 (2,685) (70,830) — 42 (1,700) — (2,417) Accumulated amortization at January 1, 2016 696,911 289,009 117,766 36,948 1,140,634 Balance at December 31, 2017 23,537 341,749 1,959,462 136,991 56,760 2,518,499 Amortization Reclassification Change in scope of consolidation Translation differences 77,240 26,815 — — — — — — 11,628 3,317 (1,766) (144) 2,419 118,102 (3,317) — (53) — (1,766) (197) Balance at December 31, 2016 774,151 315,824 130,801 35,997 1,256,773 Amortization Translation differences 72,978 27,524 — — 14,312 (3,307) 2,308 175 117,122 (3,132) Balance at December 31, 2017 847,129 343,348 141,806 38,480 1,370,763 Carrying amount at: January 1, 2016 December 31, 2016 December 31, 2017 137,572 148,245 164,341 234,158 158,817 173,613 13,471 13,391 26,080 8,522 17,845 307,810 354,394 6,605 440,456 Additions of €202,506 thousand in 2017 (€166,340 thousand in 2016) primarily relate to externally acquired and internally generated costs for the development of new and existing models. Accumulated amortization at January 1, 2016 Depreciation Divestitures Reclassification Change in scope of consolidation Translation differences Balance at December 31, 2016 Depreciation Divestitures Translation differences Balance at December 31, 2017 Carrying amount at: January 1, 2016 December 31, 2016 December 31, 2017 — — — — — — — — — — — 123,099 1,364,471 99,020 — 1,586,590 9,995 (608) 177 — 159 109,939 9,681 (11,628) (6,039) (1,786) — (1) 1,609 (312) 376 — — — — — 129,615 (18,275) — (312) 534 132,822 1,460,995 104,335 — 1,698,152 9,860 124,629 8,995 (69) (29,761) (2,469) (353) (94) (651) — — — 143,484 (32,299) (1,098) 142,260 1,555,769 110,210 — 1,808,239 22,671 208,078 327,011 32,607 22,681 204,681 325,161 28,287 23,537 199,489 403,693 26,781 35,763 88,473 56,760 626,130 669,283 710,260 Additions of €188,904 thousand in 2017 were mainly comprised of additions of €131,981 thousand to plant, machinery and equipment and additions of €39,485 thousand related to advances and assets under 264 265 FINANCIAL STATEMENTS FERRARI N.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT DECEMBER 31, 2017 AND 2016 construction. Additions to plant, machinery and equipment in 2017 mainly related to investments in cars production lines, personalization programs and engine assembly lines. Additions to advances and assets under construction in 2017 mainly related to car production lines of models to be launched in future years. Additions of €175,647 thousand in 2016 were mainly comprised of additions of €81,678 thousand to plant, machinery and equipment and additions of €81,051 thousand related to advances and assets under construction. Additions to plant, machinery and equipment in 2016 mainly related to investments in cars production lines, engine assembly lines and personalization programs. Additions to advances and assets under construction in 2016 mainly related to car production lines of models to be launched in future years. At December 31, 2017, the Group had contractual commitments for the purchase of property, plant and equipment amounting to €37,844 thousand (€49,614 thousand at December 31, 2016). 17. INVESTMENTS AND OTHER FINANCIAL ASSETS Investments accounted for using the equity method Delta Topco option Other securities and financial assets Total investments and other financial assets Investments accounted for using the equity method At December 31, 2017 2016 (€ thousand) 23,340 — 6,698 30,038 20,948 11,967 1,020 33,935 Investments accounted for using the equity method relates to the Group’s investment in FFS GmbH. In particular, on November 7, 2016, Ferrari and FCA Bank finalized an agreement to provide financial services in Europe, under which FCA Bank acquired a majority stake in FFS GmbH from Ferrari for a purchase price of €18,595 thousand, which was received upon sale. In addition to the purchase price, as a result of the funding of FFS GmbH being directly provided by FCA Bank, which is the consolidating entity of FFS GmbH following the transaction, the Group also received cash of €431,958 thousand. Upon completion of the transaction, FFS GmbH was deconsolidated and the 49.9 percent interest in FFS GmbH retained by Ferrari is accounted for using the equity method. Changes in the investments accounted for using the equity method during the years ended December 31, 2017 and 2016 were as follows: Balance at January 1, 2016 Change in scope of consolidation Fair value measurement of interest retained by the Group Proportionate share of net profit for the period from November 7 to December 31, 2016 Balance at December 31, 2016 Proportionate share of net profit for the year ended December 31, 2017 Proportionate share of remeasurement of defined benefit plans Balance at December 31, 2017 (€ thousand) — 18,542 1,489 917 20,948 2,437 (45) 23,340 266 Summarized financial information relating to FFS GmbH at and for the years ended December 31, 2017 and 2016 were as follows: Assets Intangible assets Property, plant and equipment Deferred tax assets Total non-current assets Inventories Trade receivables Receivables from financing activities Other current assets Cash and cash equivalents Total current assets Total assets Equity and liabilities Equity Non-current liabilities and provisions Debt Trade payables Other liabilities At December 31, 2017 2016 (€ thousand) 647 66 1,977 2,690 259 1,461 493,985 8,292 8,109 512,106 514,796 44,705 8,903 457,787 457 2,944 1,133 119 2,736 3,988 412 472 463,108 3,543 29,087 496,622 500,610 39,921 7,920 447,272 123 5,374 Total equity and liabilities 514,796 500,610 Net revenues Cost of sales Selling, general and administrative costs Other expenses, net Profit before taxes Income tax expense Net profit For the years ended December 31, 2017 2016 (€ thousand) 26,505 11,525 8,173 245 6,562 1,689 4,873 27,471 9,563 8,432 180 9,296 2,070 7,226 267 FINANCIAL STATEMENTS FERRARI N.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT DECEMBER 31, 2017 AND 2016 Delta Topco option The Group was granted an option to purchase a fixed number of shares in Delta Topco for a fixed price on the occurrence of certain events. Delta Topco is a company belonging to the Formula 1 Group (the group responsible for the promotion of the Formula 1 World Championship). The Group exercised the Delta Topco option as a result of the sale of Delta Topco to Liberty Media Corporation, which was completed on January 23, 2017. On February 22, 2017, the Group received (i) €10,878 thousand in cash (including €2,571 thousand of previously undistributed dividends), (ii) approximately 145 thousand Liberty Shares, which were initially recognized at cost of €2,887 thousand (based on the original underlying agreement), and (iii) €851 thousand of Liberty Media exchangeable notes in relation to the Delta Topco option. The Liberty Media exchangeable notes were subsequently converted into Liberty Media shares in November 2017. Other securities and financial assets Other securities and financial assets primarily include the Liberty Shares obtained as a result of exercising the Delta Topco option and the subsequent conversion of Liberty Media exchangeable notes into Liberty Shares. The Liberty Shares are measured at fair value which amounted to €5,705 thousand at December 31, 2017. 19. CURRENT RECEIVABLES AND OTHER CURRENT ASSETS Trade receivables Receivables from financing activities Current tax receivables Other current assets Total Trade receivables The following table sets forth a breakdown of trade receivables by nature: 18. INVENTORIES Raw materials Semi-finished goods Finished goods Total inventories At December 31, 2017 2016 (€ thousand) 99,225 87,678 206,862 393,765 95,594 72,472 155,932 323,998 Trade receivables due from: FCA Group companies Dealers Sponsors Brand activities Other Total At December 31, 2017 2016 (€ thousand) 239,410 732,947 6,125 45,441 243,977 790,377 1,312 53,729 1,023,923 1,089,395 At December 31, 2017 2016 (€ thousand) 75,245 48,166 30,058 33,283 52,658 75,694 47,208 42,789 15,650 62,636 239,410 243,977 The accrual to the provision for slow moving and obsolete inventories recognized within cost of sales and are generally settled within 15 to 60 days from the date of invoice. Trade receivables due from dealers relate to receivables for the sale of cars across the dealer network during 2017 was €10,140 thousand (€2,120 thousand in 2016 and €11,610 thousand in 2015). Changes in the provision for slow moving and obsolete inventories were as follows: At January 1, Provision Use and other changes At December 31, 268 2017 2016 (€ thousand) 60,548 10,140 (3,699) 66,989 60,588 2,120 (2,160) 60,548 Trade receivables due from FCA Group companies mainly relate to the sale of engines and car bodies to Maserati S.p.A. and Officine Maserati Grugliasco S.p.A. (together “Maserati”) which are controlled by the FCA Group. For additional information, see Note 29. Trade receivables due from sponsors relate to amounts receivable from sponsors of the Group’s Formula 1 activities. Trade receivables due from brand activities relate to amounts receivable for licensing and merchandising activities. The Group is not exposed to concentration of third party credit risk. 269 FINANCIAL STATEMENTS FERRARI N.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT DECEMBER 31, 2017 AND 2016 The following table sets forth a breakdown of trade receivables by currency: Trade receivables denominated in: Euro U.S. Dollar Pound Sterling Chinese Yuan Japanese Yen Other Total At December 31, 2017 2016 (€ thousand) 172,492 155,545 53,618 2,915 2,947 3,151 4,287 62,701 1,222 3,819 16,310 4,380 239,410 243,977 Trade receivables are shown net of an allowance for doubtful accounts determined on the basis of insolvency risk and historical experience. Accruals to the allowance for doubtful accounts are recorded in selling, general and administrative costs in the consolidated income statement. Changes in the allowance for doubtful accounts during the year were as follows: At January 1, Provision Use and other changes At December 31, Receivables from financing activities Receivables from financing activities are as follows: Client financing Dealer financing Total receivables from financing activities 2017 2016 (€ thousand) 19,174 3,231 (412) 21,993 18,371 3,504 (2,701) 19,174 At December 31, 2017 2016 (€ thousand) 704,014 758,679 28,933 31,698 732,947 790,377 Receivables from financing activities are shown net of an allowance for doubtful accounts determined on the basis of insolvency risks. Accruals to the allowance for doubtful accounts are recorded in cost of sales in the consolidated income statement. Changes in the allowance for doubtful accounts of receivables from financing activities during the year are as follows: At January 1, Provision Change in scope of consolidation Use and other changes At December 31, Client financing 2017 2016 (€ thousand) 11,556 3,530 — (8,138) 6,948 18,671 2,455 (8,409) (1,161) 11,556 Client financing relates to financing provided by the Group to Ferrari clients to finance their car acquisition. During 2017 the average contractual duration at inception of such contracts was approximately 66 months and the weighted average interest rate was approximately 5.1 percent. Receivables for client financing are generally secured on the titles of cars or other personal guarantees. Following the sale of a majority stake in FFS GmbH to FCA Bank and the deconsolidation of FFS GmbH on November 7, 2016, client financing mainly relates to activities in the United States and is denominated in U.S. Dollars. Dealer financing The Group provides dealer financing in the United States. Receivables for dealer financing are typically generated by sales of cars managed under dealer network financing programs as a component of the portfolio of the financial services companies. In 2017 these receivables were interest bearing at a rate between 3.3 percent and 6.0 percent (between 2.9 percent and 5.2 percent in 2016), with the exception of an initial limited, non-interest bearing period. The contractual terms governing the relationships with the dealer network vary from country to country, although payment terms generally range from 1 to 6 months. Receivables on dealer financing are generally secured by the title of the car or other collateral. Other current assets Other current assets are as follows: Prepayments Italian and foreign VAT credits Due from personnel Security deposits Other receivables Total other current assets At December 31, 2017 2016 (€ thousand) 27,980 11,988 959 1,014 3,500 45,441 31,611 12,032 747 932 8,407 53,729 270 271 FINANCIAL STATEMENTS FERRARI N.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT DECEMBER 31, 2017 AND 2016 At December 31, 2017, the Group had provided guarantees through third parties amounting to €132,014 thousand (€89,014 thousand at December 31, 2016), principally to banks and relevant tax author- ities in relation to (i) a U.S. Dollar denominated credit facility of FFS Inc, (ii) the validity of value added tax (“VAT”) and duties for which the Group requested reimbursement from the relevant tax authorities, (iii) the VAT related to temporary import of classic cars for restoration activities which would become due if the car is not exported. The analysis of current receivables and other current assets by due date (excluding prepayments) is as follows: At December 31, 2017 Due within one year Due between one and five years Due beyond five years (€ thousand) Overdue Total 20. CURRENT FINANCIAL ASSETS AND OTHER FINANCIAL LIABILITIES Financial derivatives Other financial assets Current financial assets At December 31, 2017 2016 (€ thousand) 11,686 3,997 15,683 10,388 5,888 16,276 Current financial assets and other financial liabilities mainly relates to foreign exchange derivatives. The following table sets further the analysis of derivative assets and liabilities at December 31, 2017 and 2016. At December 31, 2017 2016 Positive fair value Negative fair value Positive fair value Negative fair value (€ thousand) 8,848 8,848 1,729 1,109 (1,136) (1,136) (308) — 8,160 8,160 1,548 680 (39,580) (39,580) (58) — 11,686 (1,444) 10,388 (39,638) Trade receivables 207,074 — — 32,336 239,410 Receivables from financing activities Client financing Dealer financing Current tax receivables Other current receivables Total 144,621 529,489 134,972 513,079 9,649 5,667 16,767 16,410 458 682 46,894 44,020 2,874 — 7 11,943 732,947 11,943 704,014 — — 5 28,933 6,125 17,461 374,129 530,629 46,901 44,284 995,943 Cash flow hedge: Foreign currency forwards Total cash flow hedges Other foreign exchange derivatives Interest rate caps Total At December 31, 2016 Due within one year Due between one and five years Due beyond five years (€ thousand) Overdue Total Trade receivables 225,402 8 — 18,567 243,977 Receivables from financing activities Client financing Dealer financing Current tax receivables Other current receivables Total 146,412 554,030 136,602 536,954 9,810 690 21,572 17,076 622 539 48,341 43,529 4,812 — 7 41,594 790,377 41,594 758,679 — — — 31,698 1,312 22,118 394,076 555,199 48,348 60,161 1,057,784 Receivables from financing activities at December 31, 2017 and 2016 relate entirely to the financial services portfolio and are generally secured on the titles of cars or other guarantees. 272 Other foreign exchange derivatives relate to foreign currency forwards which do not meet the requirements to be recognized as cash flow hedges. Interest rate caps relate to derivative instruments we are required to enter into as part of certain of our securitization agreements. The following tables provide an analysis by foreign currency and due date of outstanding derivative financial instruments based on their fair value and notional amounts: Fair value due within one year Total fair value Notional amount due within one year Total notional amount At December 31, 2017 Currencies: U.S. Dollar Pound Sterling Chinese Yuan Swiss Franc Japanese Yen Other(1) 2,637 510 (97) 1,999 4,402 791 (€ thousand) 2,637 510 (97) 1,999 4,402 791 Total amount 10,242 10,242 (1) Other mainly includes the Australian Dollar, the Hong Kong Dollar and the Canadian Dollar. 114,317 110,032 18,095 43,552 81,890 95,738 463,624 114,317 110,032 18,095 43,552 81,890 95,738 463,624 273 FINANCIAL STATEMENTS FERRARI N.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT DECEMBER 31, 2017 AND 2016 Fair value due within one year Total fair value Notional amount due within one year Total notional amount At December 31, 2016 (€ thousand) 21. EQUITY Share capital Currencies: U.S. Dollar Pound Sterling Chinese Yuan Swiss Franc Japanese Yen Other(1) Total amount (33,758) (33,758) 3,668 (125) (476) 2,835 (1,394) (29,250) 3,668 (125) (476) 2,835 (1,394) (29,250) 788,274 106,056 19,917 47,923 91,854 74,822 788,274 106,056 19,917 47,923 91,854 74,822 1,128,846 1,128,846 (1) Other mainly includes the Australian Dollar, the Hong Kong Dollar and the Canadian Dollar. Cash flow hedges The effects recognized in the consolidated income statement mainly relate to currency risk management and in particular the exposure to fluctuations in the Euro/U.S. Dollar exchange rate for sales in U.S. Dollars. The policy of the Group for managing foreign currency risk normally requires hedging of a portion of projected future cash flows from trading activities and orders acquired (or contracts in progress) in foreign currencies which will occur within the following 12 months. It is considered reasonable that the hedging effect arising from this and recorded in the cash flow hedge reserve will be recognized in the consolidated income statement, mainly during the following 12 months. Derivatives relating to currency risk management are treated as cash flow hedges where the derivative qualifies for hedge accounting. The amount recorded in the cash flow hedge reserve will be recognized in the consolidated income statement according to the timing of the flows of the underlying transaction. At December 31, 2017 and 2016, the fully paid up share capital of the Company was €2,504 thousand, consisting of 193,923,499 common shares and 56,497,618 special voting shares, all with a nominal value of €0.01 per share. At December 31, 2017, the Company had 4,969,625 common shares and 4,099 special voting shares held in treasury, while at December 31, 2016, the Company had 5,000,000 common shares and 2,930 special voting shares held in treasury. The decrease in common shares held in treasury primarily reflects the granting of shares to Non-Executive Directors as part of their directors’ compensation. The Company did not issue new common shares or special voting shares in the initial public offering and did not receive any of the proceeds. The loyalty voting structure The purpose of the loyalty voting structure is to reward ownership of the Company’s common shares and to promote stability of the Company’s shareholder base by granting long-term shareholders of the Company with special voting shares. Following the Separation, Exor N.V. (“Exor”) and Piero Ferrari participate in the Company’s loyalty voting program and, therefore, effectively hold two votes for each of the common shares they hold. Investors who purchased common shares in the initial public offering may elect to participate in the loyalty voting program by registering their common shares in the loyalty share register and holding them for three years. The loyalty voting program will be effected by means of the issue of special voting shares to eligible holders of common shares. Each special voting share entitles the holder to exercise one vote at the Company’s shareholders meeting. Only a minimal dividend accrues to the special voting shares allocated to a separate special dividend reserve, and the special voting shares do not carry any entitlement to any other reserve of the Group. The special voting shares have only immaterial economic entitlements and, as a result, do not impact the Company’s earnings per share calculation. Retained earnings and other reserves The Group reclassified gains and losses, net of the tax effect, from other comprehensive income/(loss) Retained earnings and other reserves includes: to the consolidated income statement as follows: Net revenues/(costs) Net financial expenses Income tax (expense)/benefit Total recognized in the consolidated income statement For the years ended December 31, 2017 2016 2015 (€ thousand) 19,724 (69,368) (145,095) — (5,503) 14,221 — (23,745) 19,354 53,016 (50,014) (115,824) The ineffectiveness of cash flow hedges was not material for the years 2017, 2016 and 2015. • • the share premium reserve of €5,768,544 thousand at December 31, 2017 (€5,888,529 thousand at December 31, 2016). The share premium reserve originated from the issuance of common shares pursuant to the Restructuring and from a share premium contribution of €1,162 thousand made by FCA in 2015 and received in 2016. As explained below, the movements in 2017 and 2016 relate to cash distributions made from this reserve; the legal reserve of €8 thousand at December 31, 2017 and €14 thousand at December 31, 2016, determined in accordance with Dutch law. Following approval of the annual accounts by the shareholders at the Annual General Meeting of the Shareholders on April 14, 2017, a cash distribution of €0.635 per common share was approved, corresponding to a total distribution of €119,985 thousand. In May 2017 the Company paid €114,738 thousand of the distribution 274 275 FINANCIAL STATEMENTS FERRARI N.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT DECEMBER 31, 2017 AND 2016 and the remainder was paid in July 2017. Following approval of the annual accounts by the shareholders at the Annual General Meeting of the Shareholders on April 15, 2016, the Company paid a cash distribution of €0.46 per common share in May 2016, corresponding to a total distribution of €86,905 thousand. Both distributions were made from the share premium reserve which is a distributable reserve under Dutch law. At December 31, 2017 a cumulative amount of €28,179 thousand was recognized as an increase to other reserves for the PSU and RSU awards under the Group’s equity incentive plan. See Note 22 for additional details. Equity-settled Non-Executive Directors’ compensation amounted to €418 thousand and €1,110 thousand for the years ended December 31, 2017 and 2016 and was recognized as an increase to other reserves. See Note 29 for additional details. Other comprehensive income The following table presents other comprehensive income: Items that will not be reclassified to the consolidated income statement in subsequent periods: (Losses)/Gains on remeasurement of defined benefit plans (1) Total items that will not be reclassified to the consolidated income statement in subsequent periods Items that may be reclassified to the consolidated income statement in subsequent periods: For the years ended December 31, 2017 2016 2015 (€ thousand) (730) (1,448) (730) (1,448) 898 898 Gains/(Losses) on cash flow hedging instruments arising during the period (Gains)/Losses on cash flow hedging instruments reclassified to the consoli- dated income statement Gains on cash flow hedging instruments 54,695 (18,282) (160,606) (19,724) 69,368 168,840 34,971 51,086 8,234 Exchange differences on translating foreign operations arising during the period (15,346) 4,118 13,344 Total items that may be reclassified to the consolidated income statement in subsequent periods Total other comprehensive income Related tax impact Total other comprehensive income, net of tax 19,625 55,204 21,578 18,895 53,756 22,476 (9,554) (16,961) (2,908) 9,341 36,795 19,568 (1) For the year ended December 31, 2017 includes €45 thousand related to the Group’s proportionate share of the remeasurement of defined benefit plans of FFS GmbH, for which the Group holds a 49.9 percent interest. Losses on remeasurement of defined benefit plans mainly include actuarial gains and losses arising during the period. These gains and losses are offset against the related net defined benefit liabilities. The tax effect relating to other comprehensive income are as follows: For the years ended December 31, 2017 Related tax impact Pre-tax balance Net balance Pre-tax balance 2016 Related tax impact (€ thousand) Net balance Pre-tax balance 2015 Related tax impact Net balance (730) 203 (527) (1,448) (18) (1,466) 898 (308) 590 34,971 (9,757) 25,214 51,086 (16,943) 34,143 8,234 (2,600) 5,634 (15,346) — (15,346) 4,118 — 4,118 13,344 — 13,344 18,895 (9,554) 9,341 53,756 (16,961) 36,795 22,476 (2,908) 19,568 (Losses)/Gains on remeasurement of defined benefit plans Gains on cash flow hedging instruments Exchange gains on translating foreign operations Total other comprehensive income Transactions with non-controlling interests With the exception of dividends paid to non-controlling interests, there were no transactions with non- controlling interests for the years ended December 31, 2017 or 2016. Transactions with non-controlling interests for the year ended December 31, 2015 relate to the purchase of the remaining 10 percent of NCI of the subsidiary FFS from Aldasa GmbH. The purchase price for the FFS shares was €8,500 thousand (based on an independent valuation) and the carrying value of the 10 percent interest at the time of purchase was €5,898 thousand. In accordance with IAS 27, the difference of €2,602 thousand was recorded as a reduction to equity. Policies and processes for managing capital The Group’s objectives when managing capital are to create value for shareholders as a whole, safeguard business continuity and support the growth of the Group. As a result, the Group endeavors to maintain a satisfactory economic return for its shareholders and guarantee economic access to external sources of funds. 22. SHARE-BASED COMPENSATION Following the approval of the equity incentive plan by the Board of Directors on March 1, 2017, on April 14, 2017 the Shareholders approved an award to the Chief Executive Officer under the Company’s equity incentive plan, which is applicable to all Group Executive Council (“GEC”) members and key leaders of the Company. Under the Company’s equity incentive plan, an aggregate of approximately 687 thousand performance share units (“PSUs”) and an aggregate of approximately 119 thousand restricted share units (“RSUs”) have been awarded. The grants of the PSUs and the RSUs, each representing the right to receive one common share of the Company, cover a five-year performance period from 2016 to 2020, consistent with the Company’s strategic horizon. 276 277 FINANCIAL STATEMENTS FERRARI N.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT DECEMBER 31, 2017 AND 2016 At December 31, 2017, the Company has recognized a cumulative amount of €28,179 thousand as an increase to other reserves in equity for the PSU awards and RSU awards and had unrecognized compensation expense of approximately €26,051 thousand, which will be recognized over the remaining vesting period until 2020. Performance Share Units The Company awarded members of the GEC and key leaders a total target of approximately 237 thousand PSUs and 450 thousand PSUs to its Chief Executive Officer. The PSUs vest in three equal tranches in March 2019, 2020 and 2021, subject to the achievement of a market performance condition related to Total Shareholder Return (“TSR”). The interim partial vesting periods are independent of one another and any under-achievement in one period can be offset by over-achievement in subsequent periods. The target amount of PSUs vests as follows based on the Company’s TSR ranking compared to an industry specific peer group of eight, including the Company, (“Peer Group”): Ferrari TSR Ranking % of Target Awards that Vest 1 2 3 4 5 CEO 150% 120% 100% 75% 50% GEC and Key Leaders 150% 120% 100% — — The defined Peer Group is as follows: Hermes LVMH Burberry Moncler Brunello Cucinelli Richemont Ferragamo The total number of shares that will eventually be issued upon vesting of the PSUs may vary from the original award of 687 thousand, depending on the level of TSR performance achieved compared to the Peer Group. None of the PSU awards were forfeited and none of the outstanding PSUs had vested at December 31, 2017. The performance period for the PSUs commenced on January 1, 2016. The fair value of the awards used for accounting purposes was measured at the grant date using a Monte Carlo Simulation model. The range of the fair value of the PSUs that were awarded is €59.36-€72.06 per share. The key assumptions utilized to calculate the grant-date fair values for these awards are summarized below: Key Assumptions Grant date share price Expected volatility Dividend yield Risk-free rate €66.85 17.4% 1.2% 0% The expected volatility was based on the observed volatility of the Peer Group. The risk-free rate was based on the iBoxx sovereign Eurozone yield. Retention Restricted Share Units The Company awarded members of the GEC and key leaders a total of approximately 119 thousand RSUs. The Chief Executive Officer has not received any RSUs. The RSU awards granted to GEC members and key leaders are conditional on a recipient’s continued service to the Company, as described below. The RSUs, each of which represents the right to receive one common share of the Company, will vest in three equal tranches in March 2019, 2020 and 2021, subject to continued employment with the Company at the time of vesting. None of the RSU awards were forfeited and none of the RSU awards had vested at December 31, 2017. The performance period for the RSUs commenced on January 1, 2016. The fair value of the awards was measured using the share price at the grant date adjusted for the present value of future distributions which employees will not receive during the vesting period. The range of the fair value of the RSUs awarded is €63.00- €64.64 per share. 23. EMPLOYEE BENEFITS The Group’s provisions for employee benefits are as follows: Present value of defined benefit obligations: Italian employee severance indemnity (TFR) Pension plans Total present value of defined benefit obligations Other provisions for employees Total provisions for employee benefits Defined contribution plan At December 31, 2017 2016 (€ thousand) 22,641 23,783 604 828 23,245 24,611 60,914 84,159 66,413 91,024 The Group recognizes the cost for defined contribution plans over the period in which the employee renders service and classifies this by function in cost of sales, selling, general and administrative costs and research and development costs. The total income statement expense for defined contributions plans in the years ended December 31, 2017, 2016 and 2015 was €3,149 thousand, €9,719 thousand and €2,990 thousand, respectively. 278 279 FINANCIAL STATEMENTS FERRARI N.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT DECEMBER 31, 2017 AND 2016 Defined benefit obligations Italian employee severance indemnity (TFR) Trattamento di fine rapporto or “TFR” relates to the amounts that employees in Italy are entitled to receive when they leave the company and is calculated based on the period of employment and the taxable earnings of each employee. Under certain conditions the entitlement may be partially advanced to an employee during the employee’s working life. The Italian legislation regarding this scheme was amended by Law 296 of 27 December 2006 and subsequent decrees and regulations issued in the first part of 2007. Under these amendments, companies with at least 50 employees are obliged to transfer the TFR to the “Treasury fund” managed by the Italian state- owned social security body (“INPS”) or to supplementary pension funds. Prior to the amendments, accruing TFR for employees of all Italian companies could be managed by the company itself. Consequently, the Italian companies’ obligation to INPS and the contributions to supplementary pension funds take the form, under IAS 19 revised, of “Defined contribution plans” whereas the amounts recorded in the provision for employee severance pay retain the nature of “Defined benefit plans”. Accordingly, the provision for employee severance indemnity in Italy consists of the residual obligation for TFR until December 31, 2006. This is an unfunded defined benefit plan as the benefits have already been almost entirely earned, with the sole exception of future revaluations. Since 2007 the scheme has been classified as a defined contribution plan, and the Group recognizes the associated cost, being the required contributions to the pension funds, over the period in which the employee renders service. Pension plans Group companies, primarily in Germany sponsor non-contributory defined benefit pension plans, for which the Group meets the benefit payment obligation when it falls due. Benefits provided depends on the employee’s length of service and their salary in the final years leading up to retirement. The expected benefit payments for the defined benefit obligations are as follows: Expected benefit payments TFR Pension plans (€ thousand) 1,350 1,401 1,596 1,960 1,725 7,089 15,121 41 41 42 42 3,262 597 4,025 2018 2019 2020 2021 2022 Beyond 2022 Total 280 The following table summarizes the changes in the defined benefit obligations: TFR liability Pension plans (€ thousand) Total 23,119 391 805 (37) 23,924 354 1,580 232 1,812 (1,337) 30 23,783 — (172) — 828 142 (1,509) 30 24,611 142 685 (2,128) (65) 23,245 Amounts at December 31, 2015 Included in the consolidated income statement Included in other comprehensive income/loss Actuarial losses from financial assumptions Other Benefits paid Other changes Amounts at December 31, 2016 Included in the consolidated income statement Included in other comprehensive income/loss Actuarial losses/(gains) from financial assumptions 820 (135) Other Benefits paid Other changes Amounts at December 31, 2017 (1,964) 2 22,641 (164) (67) 604 Amounts recognized in the consolidated income statement are as follows: For the years ended December 31, 2017 Pension plans TFR Total TFR 2016 Pension plans (€ thousand) Total TFR 2015 Pension plans Total — — — 141 1 142 141 1 142 31 360 391 (41) 4 (37) (10) 364 354 8 74 82 72 — 72 80 74 154 Current service cost Interest (income)/expense Total recognized in the consolidated income statement The discount rates used for the measurement of the Italian TFR obligation are based on yields of high- quality (AA rated) fixed income securities for which the timing and amounts of payments match the timing and amounts of the projected benefit payments. For this plan, the single weighted average discount rate that reflects the estimated timing and amount of the scheme future benefit payments for 2017 is equal to 1.5 percent (1.3 percent in 2016 and 1.6 percent in 2015). The average duration of the Italian TFR is approximately 9 years. Retirement or employee leaving rates are developed to reflect actual and projected Group experience and legal requirements for retirement in Italy. 281 FINANCIAL STATEMENTS FERRARI N.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT DECEMBER 31, 2017 AND 2016 The discount rates used for the measurement of the pension plan obligation (excluding TFR) and the interest expense/(income) of net period cost, are based on the rate of return on high-quality (AA rated) fixed income investments for which the timing and amounts of payments match the timing and amounts of the projected pension defined benefit plan which for 2017 was equal to approximately 0.7 percent (1.3 percent 2016 and 1.6 percent in 2015). The average duration of the obligations is approximately 13 years. Current service cost is recognized by function in cost of sales, selling, general and administrative costs or research and development costs. The sensitivity of the defined benefit obligation to changes in the weighted principal assumptions is: At December 31, 2017 2016 Changes in assumption of +1% discount rate Changes in assumption of -1% discount rate Changes in assumption of +1% discount rate Changes in assumption of -1% discount rate (€ thousand) Impact on defined benefit obligation (1,771) 2,036 (1,909) 2,201 The above sensitivity analysis on TFR is based on a change in an assumption while holding all other assumptions constant. In practice, this is unlikely to occur, and changes in some of the assumptions may be correlated. When calculating the sensitivity of the defined benefit obligation to significant actuarial assumptions the same method has been applied as when calculating the defined benefit liability recognized in the statement of the financial position. Other provisions for employees Other provisions for employees consist of the expected future amounts payable to employees in connection with other remuneration schemes, which are not subject to actuarial valuation, including long-term bonus plans. At December 31, 2017, other provisions for employees comprised long term bonus benefits amounting to €58,090 thousand (€64,432 thousand at December 31, 2016), jubilee benefits granted to certain employees by the Group in the event of achieving 30 years of service amounting to €2,745 thousand (€1,905 thousand at December 31, 2016), and other provisions for employees benefits amounting to €79 thousand (€76 thousand at December 31, 2016). 24. PROVISIONS Changes in provisions were as follows: At December 31, 2016 Additional provisions Utilization (€ thousand) Translation differences and other At December 31, 2017 Warranty and recall campaigns provision 122,411 16,705 (15,328) Legal proceedings and disputes Other risks Total provisions 45,336 47,480 6,670 8,339 (1,271) (30,320) 215,227 31,714 (46,919) (652) (360) (1,618) (2,630) 123,136 50,375 23,881 197,392 Warranty and recall campaigns provision The warranty and recall campaigns provision represents the best estimate of commitments given by the Group for contractual, legal, or constructive obligations arising from product warranties given for a specified period of time. Such provisions are recognized on shipment of the car to the dealer. The warranty and recall campaigns provision is estimated on the basis of the Group’s past experience and contractual terms. Related costs are recognized within cost of sales. Takata airbag inflator recalls On May 4, 2016, the United States National Highway Traffic Safety Administration (“NHTSA”) published an amendment (the “Amendment”) to the November 3, 2015 Takata Consent Order regarding Takata airbags manufactured using non-desiccated Phase Stabilized Ammonium Nitrate (“PSAN”), expanding the scope of a prior recall under the Takata Consent Order. The recall is industry wide and replacement parts are limited as Takata is the single supplier. In compliance with the Amendment to the Takata Consent Order, on May 16, 2016, Takata submitted a defect information report (“DIR”) to NHTSA declaring the non-desiccated PSAN airbag inflators, including those sold by Takata to the Group, defective. Although the Group was not aware of any confirmed incidents or warranty claims relating to such airbag inflators mounted in its cars or that the airbag inflators were not performing as designed, as a result of the Amendment issued by NHTSA and the DIR issued by Takata, the Group initiated a global recall relating to certain cars produced between 2008 and 2011. Following a Third Amendment to the Coordinated Remedy Order (“ACRO”) published by NHTSA in December 2016 and an additional Takata DIR filed on January 3, 2017, the Group filed an additional DIR on January 10, 2017 to also include certain cars produced in 2012. As a result of internal assessments, in 2016 Ferrari decided to extend the recall campaign to include all cars produced in all model years based on priority groups and the timeline set by NHTSA. 282 283 FINANCIAL STATEMENTS FERRARI N.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT DECEMBER 31, 2017 AND 2016 As a result of these developments and due to the uncertainty of recoverability of the costs from Takata, an aggregate provision of €36,994 thousand was recognized within cost of sales in the year ended December 31, 2016. 25. DEBT At December 31, 2017, the provision amounted to €34,567 thousand. Such provision reflects the current best estimate for future costs related to the entire recall campaign to be carried out by the Group. Legal proceedings and disputes The provision for legal proceedings and disputes represents management’s best estimate of the expenditures expected to be required to settle or otherwise resolve legal proceedings and disputes. This class of claims relate to allegations by contractual counterparties that the Group has violated the terms of the arrangements, including by terminating the applicable relationships. Judgments in these proceedings may be issued in 2018, although any such judgment may remain subject to judicial review. While the outcome of such proceedings is uncertain, any losses in excess of the provisions recorded are not expected to be material to the Group’s financial condition or results of operations. The utilization related to the reversal of accruals for legal proceedings and disputes resolved in 2017. Accruals to the provision for legal proceedings and disputes are recognized within other expenses, net. Other risks The provision for other risks are related to disputes and matters which are not subject to legal proceedings, including disputes with suppliers, distributors, employees and other parties. The utilization in 2017 primarily relates to a dispute with a distributor as well as various contractual risks. The following table sets forth additional provisions to other risks recognized for the years ended December 31, 2017, 2016 and 2015. Recorded in the consolidated income statement within: Cost of sales Other expenses, net Selling, general and administrative costs Income tax expense For the years ended December 31, 2015 2016 2017 (€ thousand) 8,065 — 274 — 4,499 14,559 2,604 — 3,847 4,111 8 569 8,339 21,662 8,535 Balance at December 31, 2016 Proceeds from borrowings Repayments of borrowings Interest accrued and other Translation differences Balance at December 31, 2017 (€ thousand) Borrowings from banks Bonds Securitizations Other debt Total debt 836,886 497,614 485,670 10,074 (800,943) 694,172 232,520 — (91,405) 27,871 34,804 (43,084) 264 1,731 178 — (8,222) 38,059 — 1,193,517 (70,687) 556,276 (1,262) 18,329 1,848,041 971,570 (935,432) 2,173 (80,171) 1,806,181 The breakdown of debt by nature and by maturity is as follows: At December 31, 2017 2016 Due within one year Due between one and five years Due beyond five years Total Due within one year Due between one and five years Due beyond five years Total (€ thousand) Bonds — 694,623 498,894 1,193,517 — — 497,614 497,614 Securitizations 254,891 301,385 — 556,276 144,597 341,073 32,811 18,329 5,248 — — — 38,059 227,408 609,478 18,329 27,871 — 306,031 1,001,256 498,894 1,806,181 399,876 950,551 497,614 1,848,041 — — — 485,670 836,886 27,871 Borrowings from banks Other debt Total debt Borrowings from banks Borrowings from banks at December 31, 2017 mainly relate to financial liabilities of FFS Inc to support the financial services operations, and in particular (i) €29,189 thousand (€23,745 thousand at December 31, 2016) relating to a U.S. Dollar denominated credit facility for up to $50 million (drawn down for $35 million at December 31, 2017) and bearing interest at LIBOR plus a range of between 65 and 75 basis points; (ii) other borrowings from banks of €8,870 thousand (€12,707 thousand at December 31, 2016) relating to various short and medium term credit facilities. Borrowings from banks at December 31, 2016 also included €800,383 thousand relating to the Term Loan, which was fully repaid in 2017, primarily with proceeds from the 2021 Bond issued in November 2017. See “The Facility” below. The Facility On November 30, 2015, the Company, as borrower and guarantor, and certain other members of the Group, as borrowers, entered into a €2.5 billion facility with a syndicate of banks (the “Facility”). At inception, 284 285 FINANCIAL STATEMENTS FERRARI N.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT DECEMBER 31, 2017 AND 2016 the Facility comprised a bridge loan of €500 million (the “Bridge Loan”), a term loan of €1,500 million (the “Term Loan”) and a revolving credit facility of €500 million (the “RCF”). (iv) other clauses that are customarily applicable to debt securities of issuers with a similar credit standing. A breach of these covenants may require the early repayment of the notes. As of December 31, 2017 and 2016, Ferrari was in compliance with the covenants of the notes. In December 2015 the Bridge Loan and Term Loan were fully drawn down for the purposes of repaying financial liabilities with FCA, including the FCA Note that originated as a result of the Restructuring. Securitizations In March 2016, the Bridge Loan was fully repaid, primarily using the proceeds from the 2023 Bond (see “Bonds” below). In 2016 and 2017 the Company made scheduled payments and voluntary prepayments, funded in part with the proceeds of the 2021 Bond described under “Bonds” below, to fully repay the Term Loan. At December 31, 2017 and 2016 the RCF was undrawn. Proceeds of the RCF may be used from time to time for general corporate and working capital purposes of the Group. The RCF has a maturity of five years from inception of the Facility. Bonds 2023 Bond On March 16, 2016, the Company issued 1.5 percent coupon notes due March 2023, having a principal of €500 million. The bond was issued at a discount for an issue price of 98.977 percent, resulting in net proceeds of €490,729 thousand after the debt discount and issuance costs. The net proceeds were used, together with additional cash held by the Company, to fully repay the €500 million Bridge Loan under the Facility. The bond is unrated and was admitted to trading on the regulated market of the Irish Stock Exchange. The amount outstanding at December 31, 2017 of €498,894 thousand includes accrued interest of €5,938 thousand. 2021 Bond On November 16, 2017, the Company issued 0.25 percent coupon notes due January 2021, having a principal of €700 million. The bond was issued at a discount for an issue price of 99.557 percent, resulting in net proceeds of €694,172 thousand after the debt discount and issuance costs. The net proceeds were primarily used to repay the Term Loan. The bond is unrated and was admitted to trading on the regulated market of the Irish Stock Exchange. The amount outstanding at December 31, 2017 of €694,623 thousand includes accrued interest of €221 thousand. The notes for both the 2023 Bond and the 2021 Bond impose covenants on Ferrari including: (i) negative pledge clauses which require that, in case any security interest upon assets of Ferrari is granted in connection with other notes or debt securities with the consent of Ferrari are, or are intended to be, listed, such security should be equally and ratably extended to the outstanding notes, subject to certain permitted exceptions; (ii) pari passu clauses, under which the notes rank and will rank pari passu with all other present and future unsubordinated and unsecured obligations of Ferrari; (iii) events of default for failure to pay principal or interest or comply with other obligations under the notes with specified cure periods or in the event of a payment default or acceleration of indebtedness or in the case of certain bankruptcy events; and In 2016 and 2017 FFS Inc has pursued a strategy of self-financing, further reducing dependency on intercompany funding and increasing the portion of self-liquidating debt with various securitization transactions. On January 19, 2016, FFS Inc entered into a revolving securitization program for funding of up to $250 million by pledging retail financial receivables in the United States as collateral. In 2016, proceeds from the first sale of financial receivables were $242 million and were primarily used to repay intercompany loans. The funding limit of the program has been progressively increased over time, including to $275 million on December 16, 2016, to $325 million on July 14, 2017, and to $350 million on December 15, 2017. The notes bear interest at a rate per annum equal to the aggregate of LIBOR plus a margin of 65 basis points. As of December 31, 2017 total proceeds from the sales of financial receivables under the program were $325 million. The securitization agreement requires the maintenance of an interest rate cap. On October 20, 2016, FFS Inc entered into a revolving securitization program for funding of up to $200 million by pledging leasing financial receivables in the United States as collateral. In 2016, proceeds from the first sale of financial receivables were $175 million and were primarily used to repay U.S. Dollar denominated bank borrowings. On April 21, 2017 the funding limit of the program was increased to $225 million and this amount remained unchanged in the renewal of the program in September 2017. The notes bear interest at a rate per annum equal to the aggregate of LIBOR plus a margin of 65 basis points. As of December 31, 2017 total proceeds from the sales of financial receivables under the program were $222 million. The securitization agreement requires the maintenance of an interest rate cap. On December 28, 2016, FFS Inc entered into a revolving securitization program for funding of up to $120 million by pledging credit lines to Ferrari customers secured by personal vehicle collections and personal guarantees in the United States as collateral. In 2016, proceeds from the first sale of financial receivables were $64 million and were primarily used to repay U.S. Dollar denominated bank borrowings. On December 20, 2017 the funding limit of the program was increased to $135 million. The notes bear interest at a rate per annum equal to the aggregate of LIBOR plus a margin of 120 basis points. As of December 31, 2017 total proceeds from the sales of financial receivables under the program were $120 million. The securitization agreement does not require an interest rate cap. Cash collected from the settlement of receivables or lines of credit pledged as collateral is subject to certain restrictions regarding its use and is principally applied to repay principal and interest of the funding. Such cash amounted to €28,230 thousand at December 31, 2017 (€19,411 thousand at December 31, 2016). Other debt Other debt primarily relates to funding for operating activities of the Group’s U.S. subsidiaries. 286 287 FINANCIAL STATEMENTS FERRARI N.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT DECEMBER 31, 2017 AND 2016 26. OTHER LIABILITIES An analysis of other liabilities is as follows: Deferred income Advances and security deposits Accrued expenses Payables to personnel Social security payables Other Total other liabilities At December 31, 2017 2016 (€ thousand) 274,186 167,293 77,024 38,488 20,553 42,806 273,069 229,975 61,403 36,843 18,559 36,426 28. FAIR VALUE MEASUREMENT IFRS 13 establishes a hierarchy that categorizes into three levels the inputs to the valuation techniques used to measure fair value by giving the highest priority to quoted prices (unadjusted) in active markets for identical assets and liabilities (level 1 inputs) and the lowest priority to unobservable inputs (level 3 inputs). In some cases, the inputs used to measure the fair value of an asset or a liability might be categorized within different levels of the fair value hierarchy. In those cases, the fair value measurement is categorized in its entirety in the same level of the fair value hierarchy at the lowest level input that is significant to the entire measurement. Levels used in the hierarchy are as follows: • Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets and liabilities that the Group can access at the measurement date. • Level 2 inputs are inputs other than quoted prices included within level 1 that are observable for 620,350 656,275 the assets or liabilities, either directly or indirectly. Deferred income primarily includes amounts received under the scheduled maintenance program of €173,646 thousand at December 31, 2017 and €155,121 thousand at December 31, 2016, which are deferred and recognized as net revenues over the length of the maintenance program term. Deferred income also includes amounts collected under various other agreements, which are dependent upon the future performance of a service or other act of the Group. Advances and security deposits at December 31, 2017 and at December 31, 2016 primarily include advances received from clients for the purchase of special series, limited edition and supercars. Upon shipment of such cars, the advances are recognized as revenue. The decrease in 2017 primarily related to a reduction in advances received for the LaFerrari Aperta, which was partially offset by advances received for the Ferrari J50. An analysis of other liabilities (excluding accrued expenses and deferred income) by due date is as follows: At December 31, 2017 2016 Due within one year Due between one and five years Due beyond five years Total Due within one year Due between one and five years Due beyond five years Total (€ thousand) 264,380 4,760 — 269,140 309,864 4,913 7,026 321,803 Total other liabilities (excluding accrued expenses and deferred income) 27. TRADE PAYABLES Trade payables of €607,505 thousand at December 31, 2017 (€614,888 thousand at December 31, 2016) are entirely due within one year. The carrying amount of trade payables is considered to be equivalent to their fair value. • Level 3 inputs are unobservable inputs for the assets and liabilities. Assets and liabilities that are measured at fair value on a recurring basis The following table shows the fair value hierarchy for financial assets and liabilities that are measured at fair value on a recurring basis at December 31, 2017 and 2016: Cash and cash equivalents Investments and other financial assets - Liberty Shares Current financial assets Total assets Other financial liabilities Total liabilities Cash and cash equivalents Investments and other financial assets - Delta Topco option Current financial assets Total assets Other financial liabilities Total liabilities At December 31, 2017 Note Level 1 Level 2 Level 3 Total (€ thousand) 647,706 5,705 — — — 11,686 — 647,706 — — 5,705 11,686 653,411 11,686 — 665,097 — — 1,444 1,444 — — 1,444 1,444 17 20 20 At December 31, 2016 Note Level 1 Level 2 Level 3 Total (€ thousand) 457,784 — — 457,784 — — 11,967 10,388 — — 11,967 10,388 457,784 22,355 — 480,139 — — 39,638 39,638 — — 39,638 39,638 17 20 20 288 289 FINANCIAL STATEMENTS FERRARI N.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT DECEMBER 31, 2017 AND 2016 There were no transfers between fair value hierarchy levels between 2016 and 2017. In 2017, the Group exercised the Delta Topco option as a result of the sale of Delta Topco to Liberty Media Corporation, which was completed on January 23, 2017. Therefore the Delta Topco option was derecognized and the Group’s investment in the Liberty Shares and exchangeable notes were recognized. In November 2017 the Liberty exchangeable notes were converted into Liberty Shares. The fair value of current financial assets and other financial liabilities is related to derivative financial instruments and is measured by taking into consideration market parameters at the balance sheet date, using valuation techniques widely accepted in the financial business environment. In particular, the fair value of forward contracts, currency swaps and interest rate caps is determined by taking the prevailing foreign currency exchange rate and interest rates, as applicable, at the balance sheet date. The fair value of cash and cash equivalents usually approximates fair value due to the short maturity of these instruments, which consist primarily of bank current accounts. Assets and liabilities not measured at fair value on a recurring basis For financial instruments represented by short-term receivables and payables, for which the present value of future cash flows does not differ significantly from carrying value, the Group assumes that carrying value is a reasonable approximation of the fair value. In particular, the carrying amount of current receivables and other current assets and of trade payables and other liabilities approximates their fair value. The following table represents carrying amount and fair value for the most relevant categories of finan- cial assets and liabilities not measured at fair value on a recurring basis: Receivables from financing activities Client financing Dealer financing Total Debt At December 31, 2017 2016 Note Carrying amount Fair value Carrying amount Fair value (€ thousand) 732,947 732,947 790,377 790,377 704,014 704,014 758,679 758,679 19 28,933 28,933 31,698 31,698 732,947 732,947 790,377 790,377 25 1,806,181 1,819,337 1,848,041 1,849,000 29. RELATED PARTY TRANSACTIONS Pursuant to IAS 24, the related parties of the Group are entities and individuals capable of exercising control, joint control or significant influence over the Group and its subsidiaries, companies belonging to the FCA Group and Exor Group, unconsolidated subsidiaries of the Group, associates and joint ventures. In addition, members of Ferrari Group Board of Directors, Board of Statutory Auditors and executives with strategic responsibilities and their families are also considered related parties. The Group carries out transactions with related parties on commercial terms that are normal in the respective markets, considering the characteristics of the goods or services involved. Transactions carried out by the Group with these related parties are primarily of a commercial nature and, in particular, these transactions relate to: Transactions with FCA Group companies • • • • • • the sale of engines and car bodies to Maserati S.p.A. (“Maserati”) which is controlled by the FCA Group; the purchase of engine components for the use in the production of Maserati engines from FCA US LLC, which is controlled by FCA Group; the purchase of automotive lighting and automotive components from Magneti Marelli S.p.A., Automotive Lighting Italia S.p.A., Sistemi Sospensioni S.p.A. and Magneti Marelli Powertrain Slovakia s.r.o. (which form part of “Magneti Marelli”), which are controlled by the FCA Group; transactions with other FCA Group companies, mainly relating to the services provided by FCA Group companies, including human resources, payroll, tax, customs and procurement of insurance coverage and sponsorship revenues for the display of FCA Group company logos on the Formula 1 cars; in 2016, the Group sold a portion of its trade and financial receivables to the FCA Bank Group, which is a joint venture between FCA Group and Credit Agricole. On derecognition of the asset, the difference between the carrying amount and the consideration received or receivable was recognized in cost of sales; in November 2016, the Group finalized an agreement with FCA Bank to provide financial services in Europe. Under such agreement FCA Bank acquired from the Group a majority stake in FFS GmbH for a purchase price of €18,595 thousand, which the Group received upon sale. In addition to the purchase price, as a result of the funding of FFS GmbH being directly provided by FCA Bank, the Group also received cash of €431,958 thousand. Transactions with Exor Group companies • • the Group incurs rental costs from Iveco Group companies related to the rental of trucks used by the Formula 1 racing team; the Group earns sponsorship revenue from Iveco S.p.A. Transactions with other related parties • the purchase of components for Formula 1 racing cars from COXA S.p.A., controlled by Piero Ferrari; 290 291 FINANCIAL STATEMENTS FERRARI N.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT DECEMBER 31, 2017 AND 2016 • consultancy services provided by HPE S.r.l., controlled by Piero Ferrari; Non-financial assets and liabilities originating from related party transactions are as follows: • sponsorship agreement relating to Formula 1 activities with Ferretti S.p.A.; • sale of cars to certain members of the Board of Directors of Ferrari N.V. and Exor. Pursuant to the charter of the Audit Committee, the Audit Committee reviews and approves related party transactions in order ensure that they are entered into on arm’s length terms. In accordance with IAS 24, transactions with related parties also include compensation to Directors, the Audit Committee and managers with strategic responsibilities. The amounts of the transactions with related parties recognized in the consolidated income statement are as follows: For the years ended December 31, 2017 2016 2015 Net revenues Costs(1) Net financial expenses/ (income) Net revenues Costs(1) (€ thousand) Net financial expenses/ (income) Net revenues Costs(1) Net financial expenses/ (income) FCA Group companies Maserati FCA US LLC Magneti Marelli Other FCA Group companies 315,407 4,698 — 241,478 1,933 — 184,444 2,250 6 44,882 36,670 1,866 6,754 — — — 37,612 29,663 1,735 5,472 7,007 (1,191) 9,163 (471) 7,412 42,768 (11,601) — — 1,253 1,397 23,562 29,746 67 — — Total FCA Group companies 324,033 93,257 (1,191) 248,685 78,371 (471) 194,506 98,326 (11,534) Exor Group companies (excluding the FCA Group) Other related parties COXA S.p.A. HPE S.r.l. Other related parties 283 492 48 — 2,111 6,141 7,525 — Total other related parties 2,159 13,666 — — — — — 192 173 121 — 1,950 7,096 6,447 24 2,071 13,567 — — — — — 277 338 174 11 1,024 7,561 5,518 6 1,209 13,085 — — — — — Total transactions with related parties 326,475 107,415 (1,191) 250,948 92,111 (471) 195,992 111,749 (11,534) Total for the Group 3,416,890 1,986,792 29,260 3,105,084 1,899,433 27,729 2,854,369 1,848,467 10,151 1) Costs include cost of sales, selling, general and administrative costs and other expenses/(income). At December 31, 2017 2016 Trade receivables Trade payables Other current assets (1) Other liabilities (2) Trade receivables Trade payables Other current assets (1) Other liabilities (2) FCA Group companies Maserati FCA US LLC Magneti Marelli 71,560 129 899 Other FCA Group companies 2,657 3,028 6,848 8,103 4,646 Total FCA Group companies 75,245 22,625 Exor Group companies (excluding the FCA Group) 345 202 Other related parties COXA S.p.A. HPE S.r.l. Other related parties Total other related parties Total transactions with related parties 3 — 268 271 1,142 1,150 — 2,292 (€ thousand) — — — 2,097 2,097 37,496 73,532 4,462 — — 27 166 12,529 1,739 257 6,702 3,291 37,523 75,694 26,984 — — — 1,439 1,439 32,379 — — 12 32,391 — — — — — — — — — — 235 41 16 — 554 570 1,194 1,162 68 2,424 — — — — — — — — 4 4 75,861 25,119 2,097 37,523 76,499 29,449 1,439 32,395 Total for the Group 239,410 607,505 51,566 649,510 243,977 614,888 55,041 697,870 (1) Other current assets include other current assets and current tax receivables. (2) Other liabilities include other liabilities and current tax payables. Financial assets and liabilities originating from related party transactions are as follows: 2017 Current financial assets Receivables from financing activities Debt Receivables from financing activities 2016 Current financial assets Debt FCA Global Finance Total transactions with related parties — — — — — — 861 861 — — — Total for the Group 732,947 15,683 1,806,181 790,377 16,276 1,848,041 292 293 FINANCIAL STATEMENTS FERRARI N.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT DECEMBER 31, 2017 AND 2016 Emoluments to Directors, Statutory Auditors and Key Management The fees of the Directors and Statutory Auditors of Ferrari N.V. (and for 2015 also Ferrari S.p.A.) for carrying out their respective functions, including those in other consolidated companies, are as follows: Directors of Ferrari N.V. Directors of Ferrari S.p.A. Statutory auditors Total emoluments For the years ended December 31, 2017 2016 2015 (€ thousand) 8,617 — 105 8,722 17,767 — 112 17,879 243 2,904 105 3,252 The aggregate compensation to Directors of Ferrari N.V. for year ended December 31, 2017 was €17,767 thousand, inclusive of the following: • €1,277 thousand for salary; and • €16,490 thousand for share-based compensation recognized for the performance period 2016 and 2017 in relation to 450 thousand PSUs awarded to the CEO under the equity incentive plan, which covers a five-year performance period from 2016 to 2020, consistent with the Company’s strategic horizon. The PSU awards vest in three equal tranches in March 2019, 2020 and 2021, subject to the achievement of a market performance condition related to Total Shareholder Return, therefore at December 31, 2017 none of the PSU awards had vested. See Note 22 “Share-based compensation” for information related to the equity incentive plan. their Directors’ compensation in 50% cash and 50% Ferrari common shares, or alternatively, to receive 100% in Ferrari common shares. Following the Annual General Meeting of Shareholders on April 14, 2017, Non- Executive Directors’ compensation is fully settled in cash. The amounts settled in Ferrari common shares were accounted for as equity-settled share-based compensation and recognized as increases to equity in the relevant year. The aggregate compensation for remaining key management in 2017 was €16,015 thousand (€12,290 thousand in 2016), inclusive of the following: • €10,964 thousand for salary (€11,059 thousand in 2016); • €314 thousand for long-term benefits (€1,231 thousand in 2016); and • €4,737 thousand for share-based compensation in relation to PSUs and RSUs awarded to key management under the equity incentive plan for the performance period covering 2016 and 2017. The PSU and RSU awards vest in three equal tranches in March 2019, 2020 and 2021, subject to the achievement of a market performance condition related to Total Shareholder Return, therefore at December 31, 2017 none of the PSU or RSU awards had vested. See Note 22 “Share-based compensation” for information related to the equity incentive plan. 30. COMMITMENTS Arrangements with key suppliers From time to time, in the ordinary course of business, the Group enters into various arrangements with key third party suppliers in order to establish strategic and technological advantages. A limited number of these arrangements contain unconditional purchase obligations to purchase a fixed or minimum quantity of goods and/or services with fixed and determinable price provisions. The aggregate compensation to Directors of Ferrari N.V. for year ended December 31, 2016 was €8,617 thousand and for the year ended December 31, 2015, including Ferrari S.p.A., was €3,147 thousand, inclusive of the following: Arrangements with sponsors • €2,827 thousand in 2016 and €2,372 thousand in 2015 for salary; • €290 thousand in 2016 and €775 thousand in 2015 as the Group’s contribution to defined benefit obligations and long-term bonus plans; and • €5,500 thousand in 2016 for compensation costs related to the retirement of the former CEO of the Group. Non-Executive Directors’ compensation for the years ended December 31, 2017 and 2016 included €418 thousand and €1,110 thousand, respectively, that was settled in treasury shares in 2017. Following the election of the Board of Directors at the Annual General Meeting of Shareholders on April 15, 2016, Non-Executive Directors had the option to receive the board retainer fee component of Certain of the Group’s sponsorship contracts include terms whereby the Group is obligated to purchase a minimum quantity of goods and/or services from its sponsors. Future minimum purchase obligations under these arrangements at December 31, 2017 were as follows: At December 31, 2017 Due within one year Due between one and three years Due between three and five years Due beyond five years Total (€ thousand) Minimum purchase obligations 137,250 101,988 5,760 4,372 249,370 294 295 FINANCIAL STATEMENTS FERRARI N.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT DECEMBER 31, 2017 AND 2016 Operating lease agreements The future aggregate minimum lease payments under non-cancellable operating leases, mainly relating to the lease of property and cars, are as follows: Due within one year Due between one and three years At December 31, 2017 Due between three and five years (€ thousand) Due beyond five years Total Future minimum lease payments under operating lease agreements 694 1,353 105 — 2,152 During 2017, the Group’s operating lease expenses amounted to €16,964 thousand (€14,820 thousand in 2016 and €19,612 thousand in 2015). 31. QUALITATIVE AND QUANTITATIVE INFORMATION ON FINANCIAL RISKS The Group is exposed to the following financial risks connected with its operations: • • financial market risk (principally relating to foreign currency exchange rates, and to a much lesser extent, interest rates), as the Group operates internationally in different currencies; liquidity risk, with particular reference to the availability of funds and access to the credit market, should the Group require, and to financial instruments in general; The Group’s exposure to interest rate risk arises from the need to fund certain activities and the necessity to deploy surplus funds. Changes in market interest rates may have the effect of either increasing or decreasing the Group’s net profit/(loss), thereby indirectly affecting the costs and returns of financing and investing transactions. These risks could significantly affect the Group’s financial position, results of operations and cash flows, and for this reason these risks are identified and monitored, in order to detect potential negative effects in advance and take the necessary actions to mitigate them, primarily through the Group’s operating and financing activities, and if required, through the use of derivative financial instruments. The Group has in place various risk management policies, which primarily relate to foreign exchange, interest rate and liquidity risks. The Group’s risk management policies permit derivatives to be used for managing exposures to foreign exchange rates and interest rates. Counterparties to these agreements are major financial institutions. Derivatives cannot be entered into for speculative purposes. In particular, the Group used derivative financial instruments as cash flow hedges for the purpose of fixing the foreign currency exchange rate at which a predetermined proportion of forecasted transactions denominated in foreign currencies will be accounted for. Accordingly, as a result of applying risk management policies with respect to foreign currency exchange exposure, the Group’s results of operations have not been fully exposed to fluctuations in foreign currency exchange rates. However, despite these risk management policies and hedging transactions, sudden adverse movements in foreign currency exchange rates could have a significant effect on the Group’s earnings and cash flows. The Group also enters into interest rate caps as requested by certain of its securitization agreements. • credit risk, arising both from its normal commercial relations with final clients and dealers, and its Information on the fair value of derivative financial instruments held is provided in Note 20. financing activities. These risks could significantly affect the Group’s financial position, results of operations and cash flows, and for this reason the Group identifies and monitors these risks, in order to detect potential negative effects in advance and take the necessary action to mitigate them, primarily through its operating and financing activities and if required, through the use of derivative financial instruments. The following section provides qualitative and quantitative disclosures on the effect that these risks may have upon the Group. The quantitative data reported in the following section does not have any predictive value. In particular, the sensitivity analysis on finance market risks does not reflect the complexity of the market or the reaction which may result from any changes that are assumed to take place. Financial market risks Due to the nature of the Group’s business, the Group is exposed to a variety of market risks, including foreign currency exchange rate risk and to a lesser extent, interest rate risk. The Group’s exposure to foreign currency exchange rate risk arises from the geographic distribution of the Group’s shipments, as the Group generally sells its models in the currencies of the various markets in which the Group operates, while the Group’s industrial activities are all based in Italy, and primarily denominated in Euro. Information on foreign currency exchange rate risk The Group is exposed to risk resulting from changes in foreign currency exchange rates, which can affect its earnings and equity. In particular: • Where a Group company incurs costs in a currency different from that of its revenues, any change in foreign currency exchange rates can affect the operating results of that company. In 2017, the total trade flows exposed to foreign currency exchange rate risk amounted to the equivalent of 51 percent of the Group’s turnover (57 percent in 2016). • The main foreign currency exchange rate to which the Group is exposed is the Euro/U.S. Dollar for sales in U.S. Dollar in the United States and other markets where the U.S. Dollar is the reference currency. In 2017, the value of commercial activity exposed to fluctuations in the Euro/U.S. Dollar exchange rate accounted for approximately 62 percent (60 percent in 2016) of the total currency risk from commercial activity. In 2017, the commercial activity exposed to the Euro/Pound Sterling exchange rate exceeded 10 percent while in 2016 such exposure was below 10 percent. Other significant exposures included the exchange rate between the Euro and the following currencies: Japanese Yen, Chinese Renminbi, Swiss Franc, Canadian Dollar and Australian Dollar. None of these exposures, taken individually, exceeded 10 percent of the Group’s total foreign currency exchange 296 297 FINANCIAL STATEMENTS FERRARI N.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT DECEMBER 31, 2017 AND 2016 rate exposure for commercial activity in 2017. It is the Group’s policy to use derivative financial instruments to hedge between 50 and 90 percent of certain exposures subject to foreign currency exchange risk for up to twelve months. • Several subsidiaries are located in countries that are outside the Eurozone, in particular the United States, the United Kingdom, Switzerland, China, Hong Kong, Japan, Australia and Singapore. As the Group’s reporting currency is the Euro, the income statements of those companies are converted into Euro using the average exchange rate for the period and, even if revenues and margins are unchanged in local currency, changes in exchange rates can impact the amount of revenues, costs and profit as restated in Euro. • The amount of assets and liabilities of consolidated companies that report in a currency other than the Euro may vary from period to period as a result of changes in exchange rates. The effects of these changes are recognized directly in equity as a component of other comprehensive income/ (loss) under gains/(losses) from currency translation differences. Information on interest rate risk The Group’s exposure to interest rate risk, though less significant, arises from the need to fund financial services activities and the necessity to deploy surplus funds. Changes in market interest rates may have the effect of either increasing or decreasing the Group’s net profit/(loss), thereby indirectly affecting the costs and returns of financing and investing transactions. The Group’s most significant floating rate financial assets at December 31, 2017 were cash and cash equivalents and certain receivables from financing activities (related to client and dealer financing) while 32 percent of our total debt bears floating rates of interest. At December 31, 2017, a 10 basis point decrease in interest rates on floating rate financial assets and debt, with all other variables held constant, would have resulted in a decrease in profit before taxes of €225 thousand on an annual basis (an increase of €367 thousand at December 31, 2016). The analysis is based on the assumption that floating rate financial assets and debt which expires during the projected 12-month period will be renewed or reinvested in similar instruments, bearing the hypothetical short-term interest rates. The Group monitors its principal exposure to conversion exchange risk, although there was no specific Liquidity risk hedging in this respect at the reporting date. Exchange differences arising on the settlement of monetary items or on reporting monetary items at rates different from those at which they were initially recorded during the period or in previous financial statements, are recognized in the consolidated income statement within the net financial income/(expenses) line item or as cost of sales for charges arising from financial services companies. The impact of foreign currency exchange rate differences recorded within financial income/(expenses) for the year ended December 31, 2017, except for those arising on financial instruments measured at fair value, amounted to net losses of €18,059 thousand (net gains of €8,335 thousand and €10,794 thousand for the years ended December 31, 2016 and 2015, respectively). The impact of foreign currency exchange rate differences arising from financial services companies recognized under cost of sales, except for those arising on financial instruments measured at fair value, amounted to net losses of €58,808 thousand in 2016 (net gains of €20,908 thousand in 2015). Following the deconsolidation of FFS GmbH in November 2016, all of the Group’s financial services activities are conducted in the functional currency of the related financial services companies, therefore, such impact in 2017 was nil. Except as noted above, there have been no substantial changes in 2017 in the nature or structure of exposure to foreign currency exchange rate risk or in the Group’s hedging policies. The potential decrease in fair value of derivative financial instruments held by the Group at December 31, 2017 to hedge against foreign currency exchange rate risk, which would arise in the case of a hypothetical, immediate and adverse change of 10 percent in the exchange rates of the major foreign currencies with the Euro, would be approximately €45,439 thousand (€128,753 thousand at December 31, 2016). Receivables, payables and future trade flows for which hedges have been put in place were not included in the analysis. It is reasonable to assume that changes in foreign currency exchange rates will produce the opposite effect, of an equal or greater amount, on the underlying transactions that have been hedged. Liquidity risk arises if the Group is unable to obtain the funds needed to carry out its operations under economic conditions. The main determinant of the Group’s liquidity position is the cash generated by or used in operating and investing activities. From an operating point of view, the Group manages liquidity risk by monitoring cash flows and keeping an adequate level of funds at its disposal. The main funding operations and investments in cash and marketable securities of the Group are centrally managed or supervised by the treasury department with the aim of ensuring effective and efficient management of the Group’s liquidity. The Group has established series of policies which are managed or supervised centrally by the treasury department with the purpose of optimizing the management of funds and reducing liquidity risk which include: • centralizing liquidity management through the use of cash pooling arrangement • maintaining a conservative level of available liquidity • diversifying sources of funding • obtaining adequate credit lines • monitoring future liquidity requirements on the basis of business planning Intercompany financing between Group entities is not restricted other than through the application of covenants requiring that transactions with related parties be conducted at arm’s length terms. Details on the maturity profile of the Group’s financial assets and liabilities and on the structure of derivative financial instruments are provided in Notes 20 and 26. Details of the repayment of derivative financial instruments are provided in Note 20. 298 299 FINANCIAL STATEMENTS FERRARI N.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT DECEMBER 31, 2017 AND 2016 During 2015 the Group entered into a new revolving credit facility of €500 million. This facility was entirely undrawn at December 31, 2016 and 2017. The Group believes that the funds currently available to it, in addition to those that will be generated from operating activities, will enable Ferrari to satisfy the requirements of its investing activities and working capital needs, fulfill its obligations to repay its debt and ensure an appropriate level of operating and strategic flexibility. The Group, therefore believes there is no significant risk of a lack of liquidity. Credit risk Credit risk is the risk of economic loss arising from the failure to collect a receivable. Credit risk encompasses the direct risk of default and the risk of a deterioration of the creditworthiness of the counterparty. The maximum credit risk to which the Group is theoretically exposed at December 31, 2017 is represented by the carrying amounts of the financial assets stated in the consolidated statement of financial position sheet and the nominal value of the guarantees provided. Dealers and clients are subject to a specific evaluation of their creditworthiness. Additionally, it is Group practice to obtain financial guarantees against risks associated with credit granted for the purchase of cars and parts. These guarantees are further strengthened, where possible, by retaining title on cars subject to financing agreement. Credit positions of material significance are evaluated on an individual basis. Where objective evidence exists that they are uncollectible, in whole or in part, specific write-downs are recognized. The amount of the write-down is based on an estimate of the recoverable cash flows, timing of those cash flows, the cost of recovery and the fair value of any guarantees received. Receivables from financing activities amounting to €732,947 thousand at December 31, 2017 (€790,377 thousand at December 31, 2016) are shown net of the allowance for doubtful accounts amounting to €6,948 thousand (€11,556 thousand at December 31, 2016). After considering the allowance for doubtful accounts, €11,943 thousand of receivables were overdue (€41,594 thousand at December 31, 2016). Therefore, overdue receivables represent a minor portion of receivables from financing activities. Receivables from financing activities relate entirely to the financial services portfolio and such receivables are generally secured on the titles of cars or other guarantees. Trade receivables amounting to €239,410 thousand at December 31, 2017 (€243,977 thousand at December 31, 2016) are shown net of the allowance for doubtful accounts amounting to €21,993 thousand (€19,174 thousand at December 31, 2016). After considering the allowance for doubtful accounts, €32,336 thousand of receivables were overdue (€18,567 thousand at December 31, 2016). 32. ENTITY-WIDE DISCLOSURES The following table presents an analysis of net revenues by geographic location of the Group’s clients: Italy Other EMEA Americas (1) China, Hong Kong and Taiwan (on a combined basis) Rest of APAC (2) Total net revenues For the years ended December 31, 2015 2016 2017 (€ thousand) 563,921 387,184 238,532 1,308,261 1,314,788 1,209,916 920,858 282,550 341,300 835,045 272,223 295,844 884,971 257,249 263,701 3,416,890 3,105,084 2,854,369 (1) Americas includes the United States of America, Canada, Mexico, the Caribbean and of Central and South America (2) Rest of APAC mainly includes Japan, Australia, Singapore, Indonesia and South Korea The following table presents an analysis of non-current assets other than financial instruments and deferred tax assets by geographic location: 2017 Goodwill Property, plant and equipment At December 31, Intangible assets Property, plant and equipment (€ thousand) 2016 Goodwill Intangible assets Italy Other EMEA Americas (1) China, Hong Kong and Taiwan (on a combined basis) Rest of APAC (2) 704,262 785,182 439,369 661,770 785,182 353,116 2,368 2,760 264 606 — — — — — 812 — 275 2,430 3,877 258 948 — — — — — 988 — 290 Total 710,260 785,182 440,456 669,283 785,182 354,394 (1) Americas includes the United States of America, Canada, Mexico, the Caribbean and of Central and South America (2) Rest of APAC mainly includes Japan, Australia, Singapore, Indonesia and South Korea 300 301 FINANCIAL STATEMENTS INDEX TO COMPANY FINANCIAL STATEMENTS Ferrari N.V. Income Statement / Statement Of Comprehensive Income Statement Of Financial Position Statement Of Cash Flows Statement Of Changes In Equity Notes To The Company Financial Statements 304 305 306 307 308 FERRARI N.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT DECEMBER 31, 2017 AND 2016 33. SUBSEQUENT EVENTS The Group has evaluated subsequent events through February 23, 2018, which is the date the Consolidated Financial Statements were authorized for issuance. On February 9, 2018 the Company announced its intention to launch a share buyback program. The Company expects the program to involve the repurchase from time to time of up to €100 million in common shares. The program is intended to optimize the capital structure of the Company. Shares repurchased may be used to meet the Company’s obligations arising from the equity incentive plan approved in 2017. Under the program, as of February 20, 2018 the Company purchased an aggregate of 190,600 common shares on the New York Stock Exchange (NYSE) for an aggregate consideration of $22,838,301. As of February 20, 2018 the Company held 5,160,225 common shares in treasury, and in total the Company held 2.06 percent of the total issued share capital in treasury, including the common shares and the special voting shares. On February 20, 2018, the Company announced that Scuderia Ferrari has extended its partnership agreement with Philip Morris International, continuing a collaboration of nearly five decades. On February 21, 2018, the Group announced that it has selected the 88th edition of the Geneva International Motor Show for the world premiere of the Ferrari 488 Pista, the Group’s successor to Ferrari’s V8-engined special series. The Ferrari 488 Pista marks a significant step forward from the previous special series in terms of both sporty dynamics and for the level of technological carryover from racing. On February 22, 2018, the Company presented the new car for the 2018 Formula 1 World Championship. On February 23, 2018, the Board of Directors of Ferrari N.V. recommended to the Company’s shareholders that the Company declare a dividend of €0.71 per common share, totaling approximately €134 million. The proposal is subject to the approval of the Company’s shareholders at the AGM to be held on April 13, 2018. 302 303 FINANCIAL STATEMENTS Ferrari N.V. INCOME STATEMENT / STATEMENT OF COMPREHENSIVE INCOME for the years ended December 31, 2017 and 2016 Ferrari N.V. STATEMENT OF FINANCIAL POSITION at December 31, 2017 and 2016 Net revenues Other income Dividend income Cost of sales Selling, general and administrative costs Net financial expenses Profit / (Loss) before taxes Income tax benefit Net and comprehensive income / (Net and comprehensive loss) For the years ended December 31, Note 2017 2016 (€ thousand) 3 3 4 5 6 7 2,399 5,171 235,000 904 26,646 32,210 182,810 9,591 192,401 2,587 4,482 — 1,418 17,299 35,445 (47,093) 14,920 (32,173) Assets Property, plant and equipment Investments in subsidiaries Financial assets - Non-current Deferred tax assets Total non-current assets Inventories Trade receivables Tax receivables Financial assets - Current Other current assets Ferrari Group cash management pools Cash and cash equivalents Total current assets Total assets Equity and liabilities Share capital Share premium Other reserves Retained earnings / (deficit) Total equity Debt - Non-current Deferred tax liabilities Total non-current liabilities Debt - Current Trade payables Tax payables Other current liabilities Ferrari Group cash management pools Total current liabilities Total liabilities Total equity and liabilities At December 31, Note 2017 2016 (€ thousand) 8 9 11 7 10 11 7 11 11 12 13 14 16 7 16 17 7 18 12 119 101 8,778,123 8,778,123 15,417 — — 1,128 8,793,659 8,779,352 317 9,999 30,037 54,269 3,472 — 114,922 213,016 670 5,713 43,636 — 8,405 349 119,372 178,145 9,006,675 8,957,497 2,504 2,504 5,768,544 5,888,529 13,119 160,178 (15,478) (32,223) 5,944,345 5,843,332 1,625,975 1,477,889 1,206 1,627,181 1,400,574 10,820 19,078 1,978 2,699 1,435,149 3,062,330 9,006,675 — 1,477,889 1,587,183 11,598 31,859 5,636 — 1,636,276 3,114,165 8,957,497 The accompanying notes are an integral part of the Company Financial Statements. The accompanying notes are an integral part of the Company Financial Statements. 304 305 FINANCIAL STATEMENTS Ferrari N.V. Ferrari N.V. STATEMENT OF CASH FLOWS for the years ended December 31, 2017 and 2016 STATEMENTS OF CHANGES IN EQUITY for the years ended December 31, 2017 and 2016 Cash and cash equivalents at beginning of the period 119,372 49 For the years ended December 31, 2017 2016 (€ thousand) Share capital Share premium Other reserves Retained earnings/ (deficit) Total equity At December 31, 2015 Separation(1) Comprehensive loss Cash distribution of reserves Share-based compensation 50 2,454 — — — — (86,905) — At December 31, 2016 2,504 5,888,529 Comprehensive income Cash distribution of reserves Share-based compensation — — — — (119,985) — At December 31, 2017 2,504 5,768,544 (1) Reflects the effects of the Separation. (€ thousand) — — (50) (0.2) 5,975,434 (16,588) — 5,961,300 — — 1,110 (15,478) — — 28,597 13,119 (32,173) — — (32,173) (86,905) 1,110 (32,223) 5,843,332 192,401 192,401 — — (119,985) 28,597 160,178 5,944,345 Cash flows from/(used in) operating activities Profit/(Loss) before taxes Interest expenses Depreciation Other non-cash income and expenses Change in inventories Change in trade receivables Change in trade payables Change in other operating assets and liabilities Interest paid Total Cash flows (used in)/from investing activities Loans to related parties Proceeds from financial receivables with related parties Investments in property, plant and equipment Total Cash flows (used in)/from financing activities Proceeds from bonds Repayment of Term Loan Repayment of Bridge Loan Repayment of financial liabilities with related parties Proceeds from financial liabilities with related parties Change in Ferrari Group cash management pools Cash distribution of reserves Change in equity Total Total change in cash and cash equivalents Cash acquired in the Separation Cash and cash equivalents at the end of the period 182,810 31,582 24 14,772 162 (4,429) (660) 14,034 (30,257) 208,038 (53,214) — (54) (53,268) 694,172 (733,333) — (3,122) — 3,048 (119,985) — (159,220) (4,450) — 114,922 (47,093) 34,190 24 3,163 2,982 (1,991) 7,251 (414) (23,384) (25,272) — 91,846 (81) 91,765 490,729 (691,667) (500,000) — 831,538 (349) (86,905) 1,384 44,730 111,223 8,100 119,372 (*) Dividends received for the year ended December 31, 2017 of €235,000 thousand are included within profit before taxes. The accompanying notes are an integral part of the Company Financial Statements. The accompanying notes are an integral part of the Company Financial Statements. 306 307 FINANCIAL STATEMENTS FERRARI N.V. NOTES TO THE COMPANY FINANCIAL STATEMENTS 1. CORPORATE INFORMATION AND PRINCIPAL ACTIVITIES Ferrari N.V., formerly known as FE New N.V., (the “Company” or “Ferrari” and together with its subsidiaries the “Ferrari Group” or the “Group”) was incorporated as a public limited company (naamloze vennootschap) under the laws of the Netherlands on September 4, 2015 under the name FE New N.V. The Company was formed to ultimately act as a holding company for Ferrari S.p.A., which, together with its subsidiaries, is focused on the design, engineering, production and sale of luxury performance sports cars. Upon incorporation, the Company was 100 percent owned by Stitching FCA, a Dutch foundation formed by the FCA Group (as defined below), and was formed as part of a series of transactions pursuant to which Ferrari S.p.A. was separated from Fiat Chrysler Automobiles N.V. (“FCA” and together with its subsidiaries the “FCA Group”) (the “Separation”). The Separation was completed on January 3, 2016 and occurred through a series of transactions including (i) an intra-group restructuring which resulted in the Company’s acquisition of the assets and business of Ferrari North Europe Limited and the transfer by FCA of its 90 percent shareholding in Ferrari S.p.A. to the Company, (ii) the transfer of Piero Ferrari’s 10 percent shareholding in Ferrari S.p.A. to the Company, (iii) the initial public offering of common shares of the Company on the New York Stock Exchange under the ticker symbol RACE, and (iv) the distribution, following the initial public offering, of FCA’s remaining interest in the Company to FCA’s shareholders. The transactions described above in (i) and (ii) (referred to collectively as the “Restructuring”) were completed in October 2015. Upon completion of the Restructuring, Ferrari S.p.A. became a wholly owned subsidiary of New Business Netherlands N.V. (subsequently renamed Ferrari N.V.) (“Predecessor Ferrari”). The initial investment in Ferrari S.p.A. arising from the restructuring was measured based on the transaction price of €8,778 million, as determined by an independent valuation. The remaining steps of the Separation were completed between January 1 and January 3, 2016 through two consecutive demergers followed by a merger under Dutch law. As part of the Separation a new entity, FE New N.V., was created. Pursuant to the demergers the shares in the Company held by FCA were ultimately transferred to FE New N.V., with FE New N.V. issuing shares in its capital to the shareholders of FCA. In connection with the demergers, the mandatory convertible security holders of FCA also received shares in FE New N.V. All of the shares held by Stitching FCA were repurchased by the Company for no consideration, as a result of which Stitching FCA no longer has any shareholding in the Company. On completion of the Separation Predecessor Ferrari was merged with and into FE New N.V. and FE New N.V. was renamed Ferrari N.V. Following the Separation, Ferrari operates as an independent, publicly traded company. On January 4, 2016 the Company also completed the listing of its common shares on the Mercato Telematico Azionario, the stock exchange managed by Borsa Italiana, under the ticker symbol RACE. At December 31, 2017 and 2016, the fully paid up share capital of the Company amounted to €2,504 thousand, comprising 193,923,499 common shares and 56,497,618 special voting shares all with nominal value of €0.01 per share. At December 31, 2017, the Company had 4,969,625 common shares and 4,099 special voting shares held in treasury, while at December 31, 2016 the Company had 5,000,000 common shares and 2,930 special voting shares held in treasury. The authorized share capital of the Company is €7,500,000, divided into 375,000,000 common shares with nominal value of €0.01 per share and an equal number of special voting shares with nominal value of €0.01 per share. The Company’s official seat (statutaire zetel) is in Amsterdam, the Netherlands, and the Company’s registered office is in Maranello, Italy at Via Abetone Inferiore 4. The Company is registered with the Dutch trade register under number 64060977. 2. BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES Date of authorization for issuance The separate financial statements of the Company (the “Company Financial Statements”) for the year ended December 31, 2017 were authorized for issuance on February 23, 2018. Basis of preparation The Company Financial Statements are prepared on a going concern basis using the historical cost method, modified as required for the measurement of certain financial instruments. Statement of compliance The Company Financial Statements have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union (“EU IFRS”) and with Part 9 of Book 2 of the Dutch Civil Code. Measurement basis The Company Financial Statements were prepared using the same accounting policies as set out in the notes to the consolidated financial statements at December 31, 2017 (the “Consolidated Financial Statements”), except for the measurement of the investments as presented under “investments in subsidiaries” in the Company Financial Statements. Management considers the primary focus of these Company Financial Statements to be the legal entity perspective and considers that these Company Financial Statements should properly reflect the cost of the subsidiaries acquired through their contribution as well as the amounts that are eligible for distribution to the Company’s shareholders. Management believes that the measurement of its subsidiaries at cost, as permitted under EU IFRS, provides the best insight into the Company’s financial position and results, in addition to the information provided in the Consolidated Financial Statements. The accounting policies were consistently applied to all periods presented with the exception of the new standards and amendments effective from January 1, 2017, as noted below. The amounts in the Company Financial Statements are presented in thousands of Euro (€), except where otherwise indicated. 308 309 FINANCIAL STATEMENTS FERRARI N.V. NOTES TO THE COMPANY FINANCIAL STATEMENTS Format of the Company Financial Statements The Company presents the income statement by function. Statement of cash flows The statement of cash flows is prepared using the indirect method with a breakdown into cash flows from operating, investing and financing activities. Cash inflows or outflows related to taxes are reported as changes in other operating assets and liabilities as they are primarily settled through transactions with related parties as a result of the Group Italian Tax Consolidation. Dividends received are treated as part of operating activities. material impact on the Company’s financial statements upon initial adoption of the standard and related amendments. Annual Improvements to IFRS 2014-2016 Cycle - The amendments relate to three Standards: IFRS 12 - Disclosure of Interests in Other Entities (effective date of January 1, 2017, see above), IFRS 1 - First-time Adoption of International Financial Reporting Standards (effective date of January 1, 2018) and IAS 28 - Investments in Associates and Joint Ventures (effective date of January 1, 2018). The amendments clarify, correct or remove redundant wording in the related IFRS Standard and are not expected to have a material impact upon adoption. IFRS 16 - Leases - The effective date of the standard is January 1, 2019. The Company is currently evaluating the method of implementation and impact of adoption on its Company Financial Statements. New standards and amendments effective from January 1, 2017 Further information on these standards is provided in Note 2 of the Consolidated Financial Statements. The following amendments were effective from January 1, 2017 and were adopted by the Company for New standards, amendments, clarifications and interpretations issued by IASB but not yet endorsed by the EU the purpose of the preparation of the Company Financial Statements. • Amendments to IAS 12 - Income Taxes • Amendments to IAS 7 - Statement of Cash Flows The following standards, amendments and interpretations have been issued by the IASB but not yet endorsed by the EU: • Amendments to IFRS 2 - Share-based Payments • Annual Improvements to IFRS 2014-2016 Cycle - Amendments to IFRS 12 - Disclosure of Interests in Other Entities • IFRIC Interpretation 22 - Foreign Currency Transactions and Advance Consideration There were no significant effects from the adoption of these amendments. New standards issued by the International Accounting Standards Board (“IASB”) and endorsed by the European Union (“EU”) but not yet effective The following standards issued by the IASB and endorsed by the EU are effective for annual periods beginning on or after January 1, 2018: IFRS 15 - Revenue from Contracts with Customers and Clarifications to IFRS 15 - The Company will adopt the standard and amendments for its annual period beginning on January 1, 2018. The Company has completed its analysis of the impact of adoption, including an analysis of each of the Company’s revenue streams by applying the five-step model provided under IFRS 15. Based on the analysis performed, the Company concluded that the current accounting treatment of revenue from contracts with customers is in accordance with the requirements of IFRS 15 and, therefore, there will be no material impact on the Company’s financial statements upon initial adoption of the standard and related amendments. IFRS 9 - Financial Instruments - The Company will adopt the standard and amendments for its annual period beginning on January 1, 2018. The Company has completed its analysis of the impact of adoption, including an analysis of each of the Company’s classes of financial assets, financial liabilities and derivative instruments by applying the requirements provided by the new standard. Based on the analysis performed, the Company concluded that the current accounting treatment of financial assets, financial liabilities and derivative instruments is in accordance with the requirements of IFRS 9 and, therefore, there will be no • Amendments to IAS 40 - Transfers of Investment Property • • IFRS 17 - Insurance Contracts IFRIC 23 - Uncertainty over Income Tax Treatments • Amendments to IFRS 9 - Prepayment Features with Negative Compensation • Amendments to IAS 28 - Long-term Interests in Associates and Joint Ventures • Annual Improvements to IFRSs 2015-2017 Cycle • Amendments to IAS 19 - Plan Amendment, Curtailment or Settlement The Company will introduce any new standards, amendments and interpretations once they are endorsed by the European Union and as of their effective dates. Further information on these standards is provided in Note 2 of the Consolidated Financial Statements. Investments in subsidiaries Investments in subsidiaries are stated at cost, less impairment. Dividend income from the Company’s subsidiaries are recognized in the income statement when the right to receive payment is established. 310 311 FINANCIAL STATEMENTS FERRARI N.V. NOTES TO THE COMPANY FINANCIAL STATEMENTS Impairment of investments in subsidiaries Property, plant and equipment At each reporting date, the Company assesses whether there is an indication that the investments in subsidiaries may be impaired. If any such indication exists, the Company makes an estimate of the asset’s recoverable amount. The recoverable amount is defined as the higher of the fair value of the investment less costs to sell and its value in use. Where the carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. Such impairment is recognized in the income statement. An assessment is made at each reporting date as to whether there is any indication that previously recognized impairment losses may no longer exist or may have decreased. If such an indication exists, the Company makes an estimate of the recoverable amount. A previously recognized impairment loss is reversed only if there has been a change in the estimates used to determine the asset’s recoverable amount since the last impairment loss was recognized. If that is the case, the carrying amount of the asset is increased to its recoverable amount. Such recoverable amount cannot exceed the carrying amount that would have been determined if no impairment loss had been recognized for the asset in prior periods. Such a reversal is recognized in the income statement. Property, plant and equipment is recognized at cost net of accumulated depreciation. Depreciation is calculated on a straight line basis over the useful lives of the assets as follows: Office equipment Other assets Depreciation rates 20% - 22% 20% - 25% Trade receivables Trade receivables are amounts due for goods sold or services provided in the ordinary course of business. Trade receivables are initially recognized at fair value and subsequently measured at amortized cost using the effective interest rate method, less any provision for allowances. Foreign currency transactions Inventories The financial statements are prepared in Euro, which is the Company’s functional and presentation currency. Transactions in foreign currencies are recorded at the exchange rate prevailing at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the foreign currency exchange rate prevailing at that date. Exchange differences arising on the settlement of monetary items or on reporting monetary items at rates different from those at which they were initially recorded during the period or in previous financial statements are recognized in the income statement. Foreign currency translation The Company has a branch in the United Kingdom (UK) that operates in Pound Sterling. At each reporting period, the assets and liabilities within the UK branch are translated to Euro using the exchange rate at the balance sheet date and the income statement is translated using the average exchange rate for the period. Translation differences resulting from the application of this method are classified as translation differences within other comprehensive income/(loss) until the disposal of the branch. The cumulative translation differences at December 31, 2017 amounted to €2 thousand (€8 thousand at December 31, 2016). Inventories of demo vehicles and spare parts are stated at the lower of cost and net realizable value. Cost is determined on a first-in first-out (“FIFO”) basis. Provision is made for obsolete and slow-moving inventories based on their expected future use and realizable value. Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs for sale and distribution. Cash and cash equivalents Cash and cash equivalents include cash on hand, deposits held at call with banks and other short-term, highly liquid investments with original maturities of three months or less. There are no liens, pledges, collateral or restrictions on cash and cash equivalents. Cash and cash equivalents do not include amounts in Ferrari Group cash management pools. Debt Debt is measured at amortized cost using the effective interest rate method. The principal foreign currency exchange rates used to translate other currencies into Euro were as follows: Trade payables 2017 2016 Trade payables are amounts payable for services, legal and professional fees and other expenses Average At December 31, Average At December 31, incurred. Trade payables are all due within one year. U.S. Dollar Pound Sterling 1.1297 0.8767 1.1993 0.8872 1.1069 0.8194 1.0541 0.8562 Deferred income Deferred income relates to amounts received in advance under certain agreements, primarily relating to marketing-related events hosted for third party dealers, which are reliant on the future performance of a service or other act of the Company. Deferred income is recognized as net revenues or other income when the 312 313 FINANCIAL STATEMENTS FERRARI N.V. NOTES TO THE COMPANY FINANCIAL STATEMENTS Company has fulfilled its obligations under the terms of the various agreements. Deferred income is recorded on the statement of financial position within “other liabilities”. Net revenues Net revenues relate to the sale of demo vehicles and spare parts to third party dealers and other income generated for marketing-related events hosted by the Company on behalf of third party dealers, such as new car launches. Net revenues are recognized if it is probable that the economic benefits associated with a transaction will flow to the Company and the revenues can be reliably measured. Net revenues are recognized when the risks and rewards of ownership are transferred to our third party dealers or when the services have been provided, the sales price is agreed or determinable and collectability is reasonably assured. For cars this generally corresponds to the date when the cars are released to the carrier responsible for transporting cars to dealers. Net revenues are recognized net of discounts including, but not limited to, sales incentives and performance based bonuses. Other income Other income primarily relates to services performed by the Company on behalf of its subsidiaries for certain corporate services rendered and other recharge fees. Derivative financial instruments Derivative financial instruments are used for economic hedging purposes in order to reduce currency risk, principally between the Euro and the U.S. Dollar. The Company does not apply hedge accounting. All derivative financial instruments are measured at fair value. Gains and losses from the fair value measurement of derivative financial instruments are recognized immediately in the income statement within net financial expenses. Income taxes Current and deferred taxes are recognized as income or expense and are included in the income statement for the period, except tax arising from a transaction or event which is recognized, in the same or a different period, either in other comprehensive income/(loss) or directly in equity. Dividends Dividends payable by the Company are reported as a change in equity in the period in which they are approved by the shareholders as applicable under local rules and regulations. Dividend income is recognised in the income statement on the date that the right to receive payment is established. Share-based compensation The Company has implemented an equity incentive plan that provides for the granting of share-based compensation to the Chief Executive Officer, all other members of the Group Executive Council (“GEC”) and key leaders. The equity incentive plan is accounted for in accordance with IFRS 2 - Share-based Payments, which requires the Company to recognize share-based compensation based on fair value of awards granted. Share- based compensation for the equity-settled awards containing market performance conditions is measured at the grant date fair value of the award using the Monte Carlo simulation model, which requires the input of subjective assumptions, including the expected volatility of the Company’s common stock, the dividend yield, interest rates and a correlation coefficient between the common stock and the relevant market index. The fair value of the awards which are conditional only on a recipient’s continued service to the Company is measured using the share price at the grant date adjusted for the present value of future distributions which employees will not receive during the vesting period. Share based compensation is recognized over the service period. Pursuant to an agreement between the Company and various subsidiaries of the Group, the Company recharges subsidiaries for share-based compensation relating to equity instruments awarded to employees of the subsidiaries under the equity incentive plan. The Company’s portion of the share-based compensation for the equity incentive plan is recognized as an expense within selling, general and administrative costs or cost of sales in the income statement depending on the function of the employee with an offsetting entry recorded as an increase to equity, whilst share- based compensation recharged to the subsidiaries of the Group is recognized as a financial receivable with an offsetting entry recorded as an increase to equity. Non-Executive Directors’ compensation settled in common shares of the Company is accounted for as equity-settled share-based compensation and measured at the fair value of the related compensation, which is recognized as an expense over the service period with an offsetting increase to equity. Segment reporting As disclosed in the Consolidated Financial Statements, the Group has determined that it has one operating and one reportable segment based on the information reviewed by its Chief Operating Decision Maker in making decisions regarding allocation of resources and to assess performance. Use of estimates The Company Financial Statements are prepared in accordance with EU IFRS, which requires the use of estimates, judgments, and assumptions that affect the carrying amount of assets and liabilities, the disclosure of contingent assets and liabilities and the amounts of income and expenses recognized. The estimates and associated assumptions are based on elements that are known when the financial statements are prepared, on historical experience and on any other factors that are considered to be relevant. The estimates and underlying assumptions are reviewed periodically and continuously by the Company. If the items subject to estimates do not perform as assumed, then the actual results could differ from the estimates, which would require adjustment accordingly. The effects of any changes in estimate are recognized in the income statement in the period in which the adjustment is made, or prospectively in future periods. The estimates and assumptions that management considers most critical for the Company Financial Statements relate to investments in subsidiaries and in particular relating to impairment indicators. See Note 9. 314 315 FINANCIAL STATEMENTS FERRARI N.V. NOTES TO THE COMPANY FINANCIAL STATEMENTS 3. NET REVENUES AND OTHER INCOME Net revenues for the year ended December 31, 2017 amounted to €2,399 thousand (€2,587 thousand for the year ended December 31, 2016) and relate to sales of demo cars and spare parts to third parties as well as marketing-related events hosted on behalf of third party dealers and other customers. Other income for the year ended December 31, 2017 amounted to €5,171 thousand (€4,482 thousand for the year ended December 31, 2016) and primarily relates to corporate services rendered and costs recharged to Ferrari S.p.A. 4. DIVIDEND INCOME Dividend income for the year ended December 31, 2017 amounted to €235,000 thousand and related entirely to a dividend from Ferrari S.p.A, approved on November 2, 2017 and received on November 23, 2017. No dividend income was recognized for the year ended December 31, 2016. 5. SELLING, GENERAL AND ADMINISTRATIVE COSTS Selling, general and administrative costs consisted of the following: Personnel expenses Shared services provided by Ferrari S.p.A. Legal and professional services Insurance Other expenses Total selling, general and administrative costs For the years ended December 31, 2017 2016 (€ thousand) 11,808 7,436 4,061 2,043 1,298 26,646 6,118 5,830 2,447 1,501 1,403 17,299 Personnel expenses include costs related to the equity incentive plan (see Note 15), compensation for Non-Executive Directors’ and employees of the UK Branch. Detailed information on Board of Directors and key officer compensation is included in the “Corporate Governance” and “Remuneration of Directors” sections to the Annual Report. At December 31, 2017 the Company had 12 full time equivalent employees (13 at December 31, 2016), all of which relate to the UK Branch. All employees work outside of the Netherlands. Shared service costs mainly relate to services provided by Ferrari S.p.A. for human resources, payroll, tax, legal, accounting and treasury. Legal and professional services mainly relate to listing fees and expenses for legal, financial and other consulting services. 6. NET FINANCIAL EXPENSES Net financial expenses consisted of the following: Interest expenses Of which: Interest on the Term Loan and Bridge Loan (1) Interest on bonds (2) Interest on intercompany borrowings Other financial expenses Financial income Net financial expenses For the years ended December 31, 2017 2016 (€ thousand) 31,582 34,190 7,227 9,231 15,124 1,580 (952) 16,694 6,937 10,559 1,471 (216) 32,210 35,445 (1) For 2017 includes interest on the Term Loan and for 2016 on the Term Loan and the Bridge Loan. (2) For 2017 includes interest on the 2023 and 2021 bonds and for 2016 only the 2023 bond. Other financial expenses relate to bank fees and charges and net foreign exchange losses. Financial income for the year ended December 31, 2017 relates to the gain on the fair value of a currency swap entered into to hedge exposure to foreign currency exchange fluctuations of a U.S. Dollar denominated financial receivable with Ferrari Financial Services Inc. (“FFS Inc”), an indirectly held subsidiary, that was entered into in November 2017 (see Note 11 for additional details). Financial income for both 2017 and 2016 also includes interest income on cash and cash equivalents held with banks and the financial receivable with FFS Inc. 7. INCOME TAXES Income tax benefit for the years ended December 31, 2017 and 2016 is as follows: Current income tax benefit Deferred income tax (expense)/benefit Total income tax benefit For the years ended December 31, 2017 2016 (€ thousand) 11,938 (2,347) 9,591 13,788 1,132 14,920 316 317 FINANCIAL STATEMENTS FERRARI N.V. NOTES TO THE COMPANY FINANCIAL STATEMENTS Profit/(Loss) before tax Theoretical income tax (expense)/benefit Tax effect on: Non-taxable dividends Non-deductible costs Other permanent differences Total income tax benefit For the years ended December 31, 2017 2016 (€ thousand) 182,810 (43,877) 53,580 (19) (93) 9,591 (47,093) 12,951 — (55) 2,024 14,920 The theoretical income tax (expense)/benefit has been calculated at a rate of 24.0 percent for the year ended December 31, 2017 and 27.5 percent for the year ended December 31, 2016, which are the corporate rates of taxation according to the Italian Tax Code for the respective years. Tax receivables Tax payables Net For the years ended December 31, 2017 2016 (€ thousand) 30,037 19,078 10,959 43,636 31,859 11,777 Tax receivables of €30,037 thousand at December 31, 2017 (€43,636 thousand at December 31, 2016) primarily relate to amounts due from related parties for the 2017 group tax consolidation in Italy. Tax payables of €19,078 thousand at December 31, 2017 (€31,859 thousand at December 31, 2016) primarily relate to amounts due to the tax authorities for the 2017 group tax consolidation in Italy. Deferred tax assets To be recovered after 12 months To be recovered within 12 months Deferred tax liabilities To be realized after 12 months To be realized within 12 months Net deferred tax (liabilities)/assets For the years ended December 31, 2017 2016 (€ thousand) — — — (9) (1,197) (1,206) (1,206) 1,128 — 1,128 — — — 1,128 Net deferred tax liabilities of €1,206 thousand at December 31, 2017 primarily relate to timing differences arising from the deduction of bond issuance costs. Net deferred tax assets of €1,128 thousand at December 31, 2016 primarily relate to Directors’ compensation recognized but not settled in 2016. 8. PROPERTY, PLANT AND EQUIPMENT Cost Accumulated depreciation Carrying amount At December 31, 2017 2016 (€ thousand) 172 (53) 119 130 (29) 101 Property, plant and equipment relates to office furniture and equipment in the UK Branch. There are no liens, pledges, collateral or restrictions on use over property, plant and equipment. Depreciation charges of €24 thousand for the year ended December 31, 2017 (€24 thousand for the year ended December 31, 2016) were recorded within cost of sales. 9. INVESTMENTS IN SUBSIDIARIES Upon completion of the Separation on January 3, 2016, Ferrari S.p.A. became a wholly owned subsidiary of the Company. The initial investment in Ferrari S.p.A. was measured in the 2015 company financial statements of Predecessor Ferrari based on the transaction price of €8,778,000 thousand, as determined by an independent valuation. Investments in subsidiaries also includes €123 thousand relating to the subsidiary New Business 33 S.p.A. (formerly Fiat Investments S.p.A.). Investment in subsidiaries amounted to €8,778,123 thousand at December 31, 2017 and 2016. Impairment testing At December 31, 2017, the market capitalization of Ferrari N.V. at December 31, 2017 amounted to approximately €16.5 billion. The main difference in the valuation of Ferrari N.V. and the investment in Ferrari S.p.A. mainly relates to the additional net debt of €2.9 billion in Ferrari N.V. Considering the share price of the Company at December 31, 2017 and at the date of authorization of the Company Financial Statements, no impairment indicators were identified. As disclosed in Note 14 to the Consolidated Financial Statements, no impairment indicators were identified in respect to the impairment test performed for the Consolidated Financial Statements. 10. INVENTORIES Inventories at December 31, 2017 amounted to €317 thousand (€670 thousand at December 31, 2016) and relate to demo cars purchased from Ferrari S.p.A. for eventual sale to third parties. Such inventories 318 319 FINANCIAL STATEMENTS FERRARI N.V. NOTES TO THE COMPANY FINANCIAL STATEMENTS are recorded net of an accumulated provision of €353 thousand (€252 thousand at December 31, 2016). An inventory provision charge of €172 thousand was recorded within cost of sales for the year ended December 31, 2017 (€188 thousand for the year ended December 31, 2016). Financial assets Changes in the provision for slow moving and obsolete inventories were as follows: At January 1, Provision Use and other changes At December 31, 2017 2016 (€ thousand) 252 172 (71) 353 11. TRADE RECEIVABLES, FINANCIAL ASSETS AND OTHER CURRENT ASSETS Trade receivables Financial assets Other current assets Total Trade receivables At December 31, 2017 2016 (€ thousand) 9,999 69,686 3,472 83,157 127 188 (63) 252 5,713 — 8,405 14,118 Trade receivables at December 31, 2017 amounted to €9,999 thousand (€5,713 thousand at December 31, 2016) and included €9,512 thousand due from Ferrari S.p.A. for corporate services rendered and fees charged and €487 thousand due from third parties for marketing-related events (€4,216 thousand and €1,497 thousand respectively at December 31, 2016). The carrying amount of trade receivables is deemed to approximate their fair value. There are no overdue balances and no allowance has been recorded for trade receivables. The following sets forth a breakdown of trade receivables by currency: Trade receivables denominated in: Euro Pound Sterling Total At December 31, 2017 2016 (€ thousand) 3,900 6,099 9,999 2,738 2,975 5,713 Current financial receivables Non-current financial receivables Derivative financial instruments Total At December 31, 2017 2016 (€ thousand) 15,417 53,546 723 69,686 — — — — Current financial receivables for the year ended December 31, 2017 relate to a U.S. Dollar denominated loan of $64 million provided to FFS Inc in November 2017, primarily to repay the U.S. Dollar denominated portion of the Term Loan. The receivable, which amounted to €53,546 thousand at December 31, 2017, is due in November 2018 and accrues interest quarterly at a rate of LIBOR 3M + 60 basis points. Non-current financial receivables for the year ended December 31, 2017 of €15,417 thousand relate to receivables from subsidiaries, mainly Ferrari S.p.A., for recharges of share-based compensation relating to equity instruments awarded to employees of the subsidiaries under the equity incentive plan, pursuant to an intercompany agreement. The receivables will become due as the awards under the equity incentive plan begin to vest (see Note 15). Derivative financial instruments relate to the fair value of a currency swap entered into in November 2017 to hedge against the currency risk of the $64 million U.S. Dollar denominated loan provided to FFS Inc. The currency swap has a notional value of $64 million. Other current assets Other current assets of €3,472 thousand at December 31, 2017 (€8,405 thousand at December 31, 2016) primarily include VAT credits and prepaid expenses. 12. FERRARI GROUP CASH MANAGEMENT POOLS Ferrari Group cash management pools relate to the Company’s participation in a group-wide cash management system that is managed centrally by Ferrari S.p.A. At December 31, 2017, the Company had a net liability of €2,699 thousand and at December 31, 2016 the Company had a net asset of €349 thousand. 13. CASH AND CASH EQUIVALENTS Cash and cash equivalents amounted to €114,922 thousand at December 31, 2017 (€119,372 thousand at December 31, 2016) and were entirely denominated in Euro. The carrying amount of cash and cash equivalents is deemed to be in line with their fair value. There was no restricted cash at December 31, 2017 and 2016. Credit risk associated with cash and cash equivalents is considered limited as the counterparties are leading national and international banks. 320 321 FINANCIAL STATEMENTS FERRARI N.V. NOTES TO THE COMPANY FINANCIAL STATEMENTS 14. EQUITY Share capital At December 31, 2017 and 2016 the fully paid up share capital of the Company was €2,504 thousand, consisting of 193,923,499 common shares and 56,497,618 special voting shares, all with a nominal value of €0.01 per share. At December 31, 2017, the Company had 4,969,625 common shares and 4,099 special voting shares held in treasury, while at December 31, 2016 the Company held 5,000,000 common shares and 2,930 special voting shares in treasury. The authorized share capital of the Company is €7,500,000, divided into 375,000,000 common shares with nominal value of €0.01 per share and an equal number of special voting shares with nominal value of €0.01 per share. The loyalty voting structure The purpose of the loyalty voting structure is to reward ownership of the Company’s common shares and to promote stability of the Company’s shareholder base by granting long-term shareholders of the Company with special voting shares. Following the Separation, Exor B.V. (“Exor”) and Piero Ferrari participate in the Company’s loyalty voting program and, therefore, effectively hold two votes for each of the common shares they hold. Investors who purchased common shares in the initial public offering may elect to participate in the loyalty voting program by registering their common shares in the loyalty share register and holding them for three years. The loyalty voting program will be effected by means of the issue of special voting shares to eligible holders of common shares. Each special voting share entitles the holder to exercise one vote at the Company’s shareholders meetings. Only a minimal dividend accrues to the special voting shares allocated to a separate special dividend reserve, and the special voting shares do not carry any entitlement to any other reserve of the Company. Share premium A share premium reserve of €5,975,434 thousand originated from the Separation. Following approval of the annual accounts by the shareholders at the Annual General Meeting of the Shareholders on April 15, 2016, the Company paid a cash distribution of €0.46 per common share in May 2016, corresponding to a total distribution of €86,905 thousand. Following approval of the annual accounts by the shareholders at the Annual General Meeting of the Shareholders on April 14, 2017, a cash distribution of €0.635 per common share was approved, corresponding to a total distribution of €119,985 thousand. In May 2017 the Company paid €115 million of the distribution and the remaining balance was paid in July 2017. As a result of the above transactions, the share premium reserve amounted to €5,768,544 thousand at December 31, 2017 (€5,888,529 thousand at December 31, 2016). Other reserves Other reserves at December 31, 2017 and 2016 include the effects of the Separation which amounted to €16,588 thousand. At December 31, 2017 a cumulative amount of €28,179 thousand was recognized as an increase to other reserves for the awards under the Company’s equity incentive plan. Of this amount, €12,762 thousand was recognized as an expense in cost of sales and selling, general and administrative costs, and €15,417 thousand was recorded as financial receivables in relation to the costs recharged to subsidiaries. See Notes 11 and 15 for additional details. Equity-settled Non-Executive Directors’ compensation amounted to €418 thousand for the year ended December 31, 2017 (€1,110 thousand for the year ended December 31, 2016) and was recognized within selling, general and administrative costs and as an increase to other reserves. Legal reserve Pursuant to Dutch law, limitations exist relating to the distribution of shareholders’ equity up to at least the total amount of the legal reserve, as well as other reserves mandated per the Company Articles of Association. At December 31, 2017, the legal and non-distributable reserves of the Company amounted to €8 thousand (€14 thousand at December 31, 2016) and included the following: • The UK Branch operates in the Pound Sterling. At each reporting period end, the assets and liabilities within the UK branch are translated to Euro and the respective foreign currency translation gain or loss is recorded in other comprehensive income. At December 31, 2017, the cumulative translation reserve amounted to €2 thousand (€8 thousand at December 31, 2016). • The Company records a statutory non-distributable reserve equal to 1 percent of the nominal value of the special voting shares. At December 31, 2017 and 2016, this reserve amounted to €6 thousand. Reconciliation of Equity and Net Profit/Loss The reconciliation of equity as per the Consolidated Financial Statements to equity as per the Company Financial Statements is provided below: Equity attributable to owners of the parent in the Consolidated Financial Statements of Ferrari N.V. Separation (1) OCI reserves in the Consolidated Financial Statements Cumulative results of subsidiaries in the Consolidated Financial Statements in prior years Results of subsidiaries in the Consolidated Financial Statements Dividends Equity in the Company Financial Statements of Ferrari N.V. (1) Reflects differences in equity arising as a result of the effects of the Separation. At December 31, 2017 2016 (€ thousand) 778,678 324,995 5,969,427 (29,833) (430,935) (577,992) 235,000 5,944,345 5,969,427 (20,155) — (430,935) — 5,843,332 322 323 FINANCIAL STATEMENTS FERRARI N.V. NOTES TO THE COMPANY FINANCIAL STATEMENTS The reconciliation of net profit as per the Consolidated Financial Statements to net profit/(loss) as per 16. DEBT the Company Financial Statements is provided below: Net profit in the Consolidated Financial Statements of Ferrari N.V. Results of subsidiaries in the Consolidated Financial Statements Dividends Net profit/(loss) in the Company Financial Statements of Ferrari N.V. 15. SHARE-BASED COMPENSATION For the years ended December 31, 2017 2016 (€ thousand) 535,393 (577,992) 235,000 192,401 398,762 (430,935) — (32,173) Following the approval of the equity incentive plan by the Board of Directors on March 1, 2017, on April 14, 2017 the Shareholders approved an award to the Chief Executive Officer under the Group’s equity incentive plan, which is applicable to all Group Executive Council (“GEC”) members and key leaders of the Group. Under the Group’s equity incentive plan, an aggregate of approximately 687 thousand performance share units (“PSUs”) and an aggregate of approximately 119 thousand restricted share units (“RSUs”) have been awarded. The grants of the PSUs and the RSUs, which each represent the right to receive one common share of the Company, cover a five-year performance period from 2016 to 2020, consistent with the Group’s strategic horizon. Pursuant to an agreement between the Company and various subsidiaries of the Group, the Company recharges subsidiaries for share-based compensation relating to equity instruments awarded to employees of the subsidiaries under the equity incentive plan. At December 31, 2017, the Company recognized a cumulative amount of €28,179 thousand as an increase to other reserves in equity for the PSU and RSU awards. Of this amount, €12,762 thousand was recognized as an expense in cost of sales and selling, general and administrative costs, and €15,417 thousand was recorded as financial receivables in relation to share-based compensation recharged to subsidiaries. At December 31, 2017 the unrecognized share-based compensation amounted to approximately €26,051 thousand and will be recognized over the remaining vesting period until 2020. A portion of the unrecognized share-based compensation will be recharged to subsidiaries of the Company. None of the PSU awards or RSU awards were forfeited and none of the PSU awards or RSU awards had vested at December 31, 2017. See Note 22 “Share-based Compensation” to the Consolidated Financial Statements for additional details relating to the equity incentive plan. The breakdown of debt at December 31, 2017 and 2016 by nature and by maturity is as follows: At December 31, 2017 2016 Due within one year Due between one and five years Due beyond five years Total Due within one year Due between one and five years Due beyond five years Total (€ thousand) Financial liabilities with related parties Bonds Borrowings from banks 1,400,574 432,458 — 1,833,032 1,403,817 432,473 — 1,836,290 — — 694,623 498,894 1,193,517 — — 497,614 — — — 183,366 547,802 — 497,614 731,168 Total debt 1,400,574 1,127,081 498,894 3,026,549 1,587,183 980,275 497,614 3,065,072 Financial liabilities with related parties Financial liabilities with related parties at December 31, 2017 are broken down as follows: Currency Total amount outstanding at December 31, 2017 Due date Interest Rate Euro Euro Euro Euro Euro (€ thousand) 1,000,331 September 2018 EURIBOR 3M 100,141 April 2018 200,021 December 2018 100,081 May 2018 432,458 October 2019 1,833,032 EURIBOR 3M EURIBOR 3M EURIBOR 3M EURIBOR 3M Ferrari S.p.A. Ferrari S.p.A. Ferrari S.p.A. Ferrari S.p.A. Ferrari Financial Services S.p.A. Total Financial liabilities with related parties at December 31, 2016 are broken down as follows: Currency Euro Euro Euro Euro Total amount outstanding at December 31, 2016 Due date Interest Rate (€ thousand) 1,000,348 September 2017 EURIBOR 3M 300,105 September 2017 EURIBOR 3M 100,083 May 2017 432,473 October 2019 EURIBOR 3M EURIBOR 3M Ferrari S.p.A. Ferrari S.p.A. Ferrari S.p.A. Ferrari Financial Services S.p.A. Ferrari North Europe Ltd. (FNE Note) Pound Sterling 3,281 n.a. 2% Total 1,836,290 The Company repaid the FNE Note in 2017. 324 325 FINANCIAL STATEMENTS FERRARI N.V. NOTES TO THE COMPANY FINANCIAL STATEMENTS At December 31, 2017 a 10 basis point increase in interest rates on the floating rate financial liabilities, with all other variables held constant, would have resulted in a decrease in profit before tax of €1,832 thousand on an annualized basis (decrease of €2,121 thousand at December 31, 2016). Borrowings from banks At December 31, 2017 there were no borrowings from banks. Information on fair value measurement and qualitative and quantitative information on financial risks are provided in Note 28 and Note 31, respectively, to the Consolidated Financial Statements. Further information on the Group’s liquidity is provided in the “Liquidity and Capital Resources” section of this Annual Report. Based on this information the Company deems the going concern assumption adequate. Bond 2023 Bond On March 16, 2016, the Company issued 1.5 percent coupon notes due March 2023, having a principal of €500 million. The bond was issued at a discount for an issue price of 98.977 percent, resulting in net proceeds of €490,729 thousand after the debt discount and issuance costs. The net proceeds together with additional cash held by the Company, were used to fully repay the €500,000 thousand Bridge Loan under the Facility. The bond is unrated and was admitted to trading on the regulated market of the Irish Stock Exchange. The amounts outstanding at December 31, 2017 and 2016 of €498,894 thousand and €497,614 thousand, respectively, include accrued interest of €5,938 thousand. 2021 Bond On November 16, 2017, the Company issued 0.25 percent coupon notes due January 2021, having a principal of €700 million. The bond was issued at a discount for an issue price of 99.557 percent, resulting in net proceeds of €694,172 thousand after the debt discount and issuance costs. The net proceeds were primarily used to fully repay the Term Loan and the remainder will be used for general corporate purposes. The bond is unrated and was admitted to trading on the regulated market of the Irish Stock Exchange. The amount outstanding at December 31, 2017 of €694,623 thousand includes accrued interest of €221 thousand. The notes for both the 2013 Bond and the 2021 Bond impose covenants on Ferrari including: (i) negative pledge clauses which require that, in case any security interest upon assets of Ferrari is granted in connection with other notes or debt securities with the consent of Ferrari are, or are intended to be, listed, such security should be equally and ratably extended to the outstanding notes, subject to certain permitted exceptions; (ii) pari passu clauses, under which the notes rank and will rank pari passu with all other present and future unsubordinated and unsecured obligations of Ferrari; (iii) events of default for failure to pay principal or interest or comply with other obligations under the notes with specified cure periods or in the event of a payment default or acceleration of indebtedness or in the case of certain bankruptcy events; and (iv) other clauses that are customarily applicable to debt securities of issuers with a similar credit standing. A breach of these covenants may require the early repayment of the notes. As of December 31, 2017 and 2016, the Company was in compliance with the covenants of the notes. At December 31, 2016 borrowings from banks of €731,168 thousand related entirely to the Term Loan (as defined below) which was fully repaid in 2017, primarily with proceeds from the 2021 Bond issued in November 2017. See “The Facility” below. Currency Principal Book value Interest rate At December 31, 2016 (€ thousand) Euro 733,333 731,168 EURIBOR 3M +80bps Term Loan The Facility On November 30, 2015, Predecessor Ferrari, as borrower and guarantor, and certain other members of the Predecessor Ferrari group, as borrowers, entered into a €2.5 billion facility with a syndicate of banks (the “Facility”). The Facility comprises a bridge loan of €500 million (the “Bridge Loan”), a term loan of €1,500 million (the “Term Loan”) and a revolving credit facility of €500 million (the “RCF”). In December 2015 the Bridge Loan and Term Loan were fully drawn down for the purposes of repaying financial liabilities with FCA, including the Note issued to the company by FCA (“FCA Note”) recognized in connection with the restructuring. In March 2016, the Bridge Loan was fully repaid, primarily using the proceeds from the 2023 Bond. In 2016 and 2017 the Company made scheduled payments and voluntary prepayments, funded in part with the proceeds of the 2021 Bond, to fully repay the Term Loan. At December 31, 2017 and 2016 the RCF was undrawn. Proceeds of the RCF may be used from time to time for general corporate and working capital purposes of the Group. The RCF has a maturity of five years from inception of the Facility. 17. TRADE PAYABLES Due to related parties Due to third parties Total trade payables At December 31, 2017 2016 (€ thousand) 9,305 1,515 10,820 6,641 4,957 11,598 Due to related parties primarily relates to amounts owing to Ferrari S.p.A. for corporate services rendered and costs recharged. Due to third parties relates to costs for marketing-related events and legal and professional services. 326 327 FINANCIAL STATEMENTS FERRARI N.V. NOTES TO THE COMPANY FINANCIAL STATEMENTS The following sets for a breakdown of trade payables by currency: 21. REMUNERATION Trade payables denominated in: Euro Pound Sterling Total At December 31, 2017 2016 (€ thousand) 8,407 2,413 10,820 7,801 3,797 11,598 Detailed information on Board of Directors and key officer compensation is included in the “Corporate Governance” and “Remuneration of Directors” sections to the Annual Report. 22. COMMITMENTS AND CONTINGENCIES At December 31, 2017 and 2016, the Company provided guarantees over certain debt of its subsidiary Ferrari Financial Services Inc. The book value of the related debt at December 31 2017 and 2016 was €29,189 thousand and €93,012 thousand, respectively. Trade payables are due within one year and their carrying amount at the reporting date is deemed to 23. RELATED PARTY TRANSACTIONS approximate their fair value. 18. OTHER CURRENT LIABILITIES Pursuant to IAS 24, the related parties with which the Company has transactions are Ferrari S.p.A. and other companies within the Ferrari Group. The Group carries out transactions with related parties on commercial terms that are normal in their respective markets, considering the characteristics of the goods or services involved. Other current liabilities amounted to €1,978 thousand at December 31, 2017 (€5,636 thousand at December 31, 2016) and primarily relate to employee benefits, provisions, deferred income and VAT payable. Related party transactions include: Deferred income principally relates to advances received from dealers for marketing-related events, • Purchase of demo vehicles and spare parts from Ferrari S.p.A. (Note 10) such as new car launches. 19. EARNINGS PER SHARE • Corporate services and recharge of expenses to Ferrari S.p.A. (Note 5) • Share services received from Ferrari S.p.A. mainly related to human resources, payroll, tax, legal, Earnings per share information is provided in Note 13 to the Consolidated Financial Statements. accounting and treasury. (Note 5) 20. AUDIT FEES The fees for services provided by the Company’s independent auditors, Ernst & Young Accountants LLP, and its member firms and/or affiliates, to the Company and its subsidiaries are broken down as follows: Audit fees Audit-related fees Tax fees Total At December 31, 2017 2016 (€ thousand) 1,610 2 4 1,616 1,554 25 32 1,611 Audit fees of Ernst & Young Accountants LLP amounted to €100 thousand in 2017 (€100 thousand in 2016) and are included in the table above. • Participation in a Ferrari Group-wide cash management system where the operating cash management, main funding operations and liquidity investment of the Ferrari Group are centrally coordinated by Ferrari S.p.A. Amounts recorded as Ferrari Group cash management pools represented the Company’s participation in such pools. (Note 12) • Financial liabilities with Ferrari S.p.A., Ferrari Financial Services S.p.A. and Ferrari North Europe Ltd. (Note 16) • Financial receivables with Ferrari Financial Services Inc. originated in 2017 primarily to repay the U.S denominated portion of the Term Loan (Note 11) • Key management compensation (Note 21). The impact of transactions with related parties on the Company Financial Statements is disclosed separately in the relevant notes. 328 329 FINANCIAL STATEMENTS FERRARI N.V. NOTES TO THE COMPANY FINANCIAL STATEMENTS 24. ORGANIZATIONAL STRUCTURE 25. SUBSEQUENT EVENTS The following table sets forth the Company’s subsidiaries and associates at December 31, 2017: The Company has evaluated subsequent events through February 23, 2018, which is the date the Name Country Nature of business Shares held by the Group Directly held interests Ferrari S.p.A. New Business 33 S.p.A. Indirectly held through Ferrari S.p.A. Ferrari North America Inc. Ferrari Japan KK Italy Italy USA Japan Manufacturing Holding company Importer and distributor Importer and distributor Ferrari Australasia Pty Limited Australia Importer and distributor Ferrari International Cars Trading (Shanghai) Co. L.t.d. China Importer and distributor Ferrari (HK) Limited Ferrari Far East Pte Limited Ferrari Management Consulting (Shanghai) Co. L.t.d. Ferrari South West Europe S.a.r.l. Ferrari Central East Europe GmbH G.S.A. S.A. Mugello Circuit S.p.A. Ferrari Financial Services S.p.A. Indirectly held through other Group entities Ferrari Financial Services Inc. Ferrari Auto Securitization Transaction, LLC Ferrari Auto Securitization Transaction - Lease, LLC Ferrari Auto Securitization Transaction - Select, LLC Ferrari Financial Services Titling Trust 410, Park Display Inc. Associated companies valued at cost Hong Kong Importer and distributor Singapore Service company China France Service company Service company Germany Service company Switzerland Service company Italy Italy USA USA USA USA USA USA Racetrack management Financial services Financial services Financial services Financial services Financial services Financial services Retail Fondazione Casa di Enzo Ferrari Italy Service company Branches UK Branch UK Sales and after sales support 100% 100% 100% 100% 100% 80% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 25% The liquidation process of Ferrari North Europe Limited, which at December 31, 2016 was a wholly owned subsidiary, was completed in June 2017. Financial Statements were authorized for issuance. On February 9, 2018 the Company announced its intention to launch a share buyback program. The Company expects the program to involve the repurchase from time to time of up to €100 million in common shares. The program is intended to optimize the capital structure of the Company. Shares repurchased may be used to meet the Company’s obligations arising from the equity incentive plan approved in 2017. Under the program, as of February 20, 2018 the Company purchased an aggregate of 190,600 common shares on the New York Stock Exchange (NYSE) for an aggregate consideration of $22,838,301. As of February 20, 2018 the Company held 5,160,225 common shares in treasury, and in total the Company held 2.06 percent of the total issued share capital in treasury, including the common shares and the special voting shares. On February 23, 2018, the Board of Directors of Ferrari N.V. recommended to the Company’s shareholders that the Company declare a dividend of €0.71 per common share, totaling approximately €134 million. The proposal is subject to the approval of the Company’s shareholders at the AGM to be held on April 13, 2018. February 23, 2018 Board of Directors Sergio Marchionne John Elkann Piero Ferrari Delphine Arnault Louis C. Camilleri Giuseppina Capaldo Eddy Cue Sergio Duca Lapo Elkann Amedeo Felisa Maria Patrizia Grieco Adam Keswick Elena Zambon 330 331 FINANCIAL STATEMENTS OTHER INFORMATION Independent Auditor’s Report The report of the Company’s independent auditor, Ernst & Young Accountants LLP, the Netherlands, is set forth at the end of this Annual Report. Dividends Dividends will be determined in accordance with the articles 23 of the Articles of Association of Ferrari N.V. The relevant provisions of the Articles of Association read as follows: 1. The Company shall maintain a special capital reserve to be credited against the share premium exclusively for the purpose of facilitating any issuance or cancellation of special voting shares. The special voting shares shall not carry any entitlement to the balance of the special capital reserve. The Board of Directors shall be authorized to resolve upon (i) any distribution out of the special capital reserve to pay up special voting shares or (ii) re-allocation of amounts to credit or debit the special capital reserve against or in favor of the share premium reserve. 2. The Company shall maintain a separate dividend reserve for the special voting shares. The special voting shares shall not carry any entitlement to any other reserve of the Company. Any distribution out of the special voting rights dividend reserve or the partial or full release of such reserve will require a prior proposal from the Board of Directors and a subsequent resolution of the meeting of holders of special voting shares. the share capital and the reserves that must be maintained pursuant to Dutch law and the Company’s Articles of Association. No distribution of profits or other distributions may be made to the Company itself for shares that the Company holds in its own share capital. 8. The distribution of profits shall be made after the adoption of the annual accounts, from which it appears that the same is permitted. 9. The Board of Directors shall have power to declare one or more interim distributions of profits, provided that the requirements of paragraph 7 hereof are duly observed as evidenced by an interim statement of assets and liabilities as referred to in Section 2:105 paragraph 4 of the Dutch Civil Code and provided further that the policy of the Company on additions to reserves and distributions of profits is duly observed. The provisions of paragraphs 2 and 3 hereof shall apply mutatis mutandis. 10. The Board of Directors may determine that distributions are made from the Company’s share premium reserve or from any other reserve, provided that payments from reserves may only be made to the Shareholders that are entitled to the relevant reserve upon the dissolution of the Company. 11. Distributions of profits and other distributions shall be made payable in the manner and at such date(s) - within four (4) weeks after declaration thereof - and notice thereof shall be given, as the general meeting of Shareholders, or in the case of interim distributions of profits, the Board of Directors shall determine. 3. From the profits, shown in the annual accounts, as adopted, such amounts shall be reserved as the Board of Directors may determine. 12. Distributions of profits and other distributions, which have not been collected within five (5) years and one (1) day after the same have become payable, shall become the property of the Company. Branch offices Please make reference to Note 24 of the Company Financial Statements included in this Annual Report. 4. The profits remaining thereafter shall first be applied to allocate and add to the special voting shares dividend reserve an amount equal to one percent (1%) of the aggregate nominal value of all outstanding special voting shares. The calculation of the amount to be allocated and added to the special voting shares dividend reserve shall occur on a time-proportionate basis. If special voting shares are issued during the financial year to which the allocation and addition pertains, then the amount to be allocated and added to the special voting shares dividend reserve in respect of these newly issued special voting shares shall be calculated as from the date on which such special voting shares were issued until the last day of the financial year concerned. The special voting shares shall not carry any other entitlement to the profits. 5. Any profits remaining thereafter shall be at the disposal of the general meeting of Shareholders for distribution of profits on the common shares only, subject to the provision of paragraph 8 of this article. 6. Subject to a prior proposal of the Board of Directors, the general meeting of Shareholders may declare and pay distribution of profits and other distributions in United States Dollars. Furthermore, subject to the approval of the general meeting of Shareholders and the Board of Directors having been designated as the body competent to pass a resolution for the issuance of shares in accordance with Article 6, the Board of Directors may decide that a distribution shall be made in the form of shares or that Shareholders shall be given the option to receive a distribution either in cash or in the form of shares. 7. The Company shall only have power to make distributions to Shareholders and other persons entitled to distributable profits to the extent the Company’s equity exceeds the sum of the paid in and called up part of 332 333 FINANCIAL STATEMENTS INDEPENDENT AUDITOR’S REPORT To: the shareholders and audit committee of Ferrari N.V. Report on the audit of the 2017 financial statements included in the annual report Our opinion We agreed with the audit committee that misstatements in excess of €1.8 million, which are identified during the audit, would be reported to them, as well as smaller misstatements that in our view must be reported on qualitative grounds. We have audited the 2017 financial statements of Ferrari N.V. (the Company), incorporated in Amsterdam, the Netherlands. Scope of the group audit In our opinion the accompanying financial statements give a true and fair view of the financial position of Ferrari N.V. as at December 31, 2017, and of its result and its cash flows for 2017, in accordance with International Financial Reporting Standards, as adopted by the European Union (EU-IFRS), and with Part 9 of Book 2 of the Dutch Civil Code. The financial statements comprise: • The consolidated and Company statement of financial position as at December 31, 2017 • The following statements for 2017: the consolidated and Company income statement, the consolidated and Company statements of comprehensive income, cash flows and changes in equity • The notes comprising a summary of the significant accounting policies and other explanatory information Basis for our opinion We conducted our audit in accordance with Dutch law, including the Dutch Standards on Auditing. Our responsibilities under those standards are further described in the “Our responsibilities for the audit of the financial statements” section of our report. We are independent of Ferrari N.V., in accordance with the EU Regulation on specific requirements regarding statutory audit of public-interest entities, the Wet toezicht accountantsorganisaties (Wta, Audit firms supervision act), the Verordening inzake de onafhankelijkheid van accountants bij assurance-opdrachten (ViO, Code of Ethics for Professional Accountants, a regulation with respect to independence) and other relevant independence regulations in the Netherlands. Furthermore, we have complied with the Verordening gedrags- en beroepsregels accountants (VGBA, Dutch Code of Ethics). We believe the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Materiality Materiality €36 million (2016: €28 million) Benchmark applied Explanation Approximately 5% of consolidated profit before taxes We consider an earnings-based measure, particularly profit before taxes, as the appropriate basis for determining our materiality because the users of the financial statements of profit- oriented entities tend to focus on operational performance We have also taken misstatements into account and/or possible misstatements that in our opinion are material for the users of the financial statements for qualitative reasons. Ferrari N.V. is the parent of a group of entities. The financial information of this group is included in the consolidated financial statements of Ferrari N.V. Our group audit mainly focused on significant group entities. Group entities are considered significant because of their individual financial significance or because they are more likely to include significant risks of material misstatement due to their specific nature or circumstances. All significant group entities were included in the scope of our group audit. We identified two group entities, which, in our view, required an audit of their complete financial information, either due to their overall size or their risk characteristics. Specific scope audit procedures on certain balances and transactions were performed on four entities. Other procedures were performed on the remaining entities. In establishing the overall approach to the audit, we determined the work to be performed by us, as group auditors, or by component auditors from Ernst & Young Global member firms and operating under our coordination and supervision. We have performed the following procedures: • We visited EY Italy to review the audit work performed on the group consolidation, financial statements and related disclosures and the key audit matters related to Ferrari S.p.A.: revenue recognition and warranty and recall campaigns provisions. We reviewed the audit files of the component auditor and determined the sufficiency and appropriateness of the work performed. • Other component auditors included in the group audit scope received detailed instructions, including key risks and audit focus areas, and we reviewed the reporting deliverables for Ferrari North America Inc. and Ferrari Financial Services Inc. The entities included in the group audit scope represent 99% of the group’s total assets and 99% of net revenues. The scope of the procedures performed is detailed in the graphs reported below: By performing the procedures at group entities, together with additional procedures at group level, we have been able to obtain sufficient and appropriate audit evidence about the group’s financial information to provide an opinion on the financial statements. 334 335 FINANCIAL STATEMENTS INDEPENDENT AUDITOR’S REPORT To: the shareholders and audit committee of Ferrari N.V. Our key audit matters Warranty and recall campaigns provision Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements. We have communicated the key audit matters to the audit committee. The key audit matters are not a comprehensive reflection of all matters discussed. These matters were addressed in the context of our audit of the financial statements as a whole and in forming our opinion thereon, and we do not provide a separate opinion on these matters. The key audit matters are consistent with those reported in prior year. Key observations (as communicated to the audit committee) As a result of the audit procedures per- formed we did not identify any material misstatement in the revenues reported in the financial statements. Risk Our audit approach Revenue recognition is The Company recognizes revenue for sales of vehicles, net of discounts, cash sales incentives and rebates recognized to dealers or customers, when persuasive evidence of an arrangement exists, collectability reasonably assured, and the risks and rewards of ownership have transferred to the customer (for vehicle sales, generally when the vehicle is released to the carrier responsible for transporting vehicles to dealers). The Company grants to customers the opportunity to benefit of maintenance programs performed by authorized dealers. The scheduled maintenance service is included in the price paid by the customer for the car. The free maintenance programs annual maintenance services, performed once a year, for a period of 7 years. Other to relate sponsorships, commercial, brand and engine sales. Revenue recognition is inherently an area of audit risk which we substantially focus on. The Company has disclosed its accounting policy related to revenue recognition in the financial statements under note 2: significant accounting policies. streams revenue include Our procedures, designed to be responsive to the risk identified, included the following: We confirmed our understanding of the revenues recognition process for each class of transaction, evaluated the Company’s accounting policy, and the design and operating assessed effectiveness of relevant internal controls. We performed sales cut-off testing procedures, with an additional focus on shipping terms or manual adjustments. We performed in depth analysis on revenues and margin, disaggregated by month, on the Company’s key revenues streams, compared to operational data (i.e. cars/engines shipping data), identify and assess any unusual to fluctuations. We performed testing of sales incentive programs and late period-end sale, including a retrospective review of any credits to customers issued subsequent to the year-end date. We assessed the reasonableness of the fair value allocated to vehicle sales and maintenance programs based on the relative stand-alone selling price. We further tested the recognition of revenues over the maintenance programs terms and underlying base data. Finally, we reviewed the adequacy of the disclosures made by the Company re- garding revenue recognition. As a result of the audit procedures performed we did not identify any material misstatement in the provision for warranty and recall campaigns reported in the financial statements. Our procedures, designed to be respon- sive to the risk identified, included the following: We confirmed our understanding of recall campaign the warranty and provisioning process, evaluated the Company’s accounting policy, and assessed the design and operating effectiveness of relevant internal controls. We assessed the reasonableness of the methodology and assumptions used by management in estimating future costs for warranty programs and recall campaigns, and assessed any changes, or the lack thereof, from the prior year. We completed analytical procedures aimed at assessing the reasonableness of the accrued provisions. We completed a retrospective analysis comparing the provisions recorded by the Company against actual spending for warranty and recall service costs to corroborate the cost assumptions used by management. Finally, we reviewed the adequacy of the disclosures made by the Company. As at December 31, 2017 warranty and recall campaigns provision amounts to €123 million. The Company establishes provisions for product warranties at the time the sale is recognized to guarantee the performance of vehicles from defects that may become apparent within a certain period or term. The provision includes management’s best estimate of the expected cost to fulfill the obligations over the contractual warranty period based on the Company’s historical claims or costs experience and the cost of parts and services to be incurred. In addition, the Company periodically initiates voluntary service actions to address various client satisfaction, safety and emissions issues related to cars sold. Included in the provision are the estimated costs of these services and recall actions. Estimates of the future costs of these to numerous subject actions are uncertainties, including the enactment of new laws and regulations, the number of vehicles affected by warranty or recall actions and the nature of the corrective action that may result in adjustments to the established provisions. The costs related to these provisions are recognized within cost of sales. its The Company has disclosed accounting policy related to warranty and recall campaigns provision in the financial statements under note 2: significant accounting policies. Report on other information included in the annual report In addition to the financial statements and our auditor’s report thereon, the annual report contains other information that consists of: • The board report • Other information pursuant to Part 9 of Book 2 of the Dutch Civil Code 336 337 FINANCIAL STATEMENTS INDEPENDENT AUDITOR’S REPORT To: the shareholders and audit committee of Ferrari N.V. Based on the following procedures performed, we conclude that the other information: Our responsibilities for the audit of the financial statements • Is consistent with the financial statements and does not contain material misstatements Our objective is to plan and perform the audit assignment in a manner that allows us to obtain sufficient • Contains the information as required by Part 9 of Book 2 of the Dutch Civil Code We have read the other information. Based on our knowledge and understanding obtained through our audit of the financial statements or otherwise, we have considered whether the other information contains material misstatements. By performing these procedures, we comply with the requirements of Part 9 of Book 2 of the Dutch Civil Code and the Dutch Standard 720. The scope of the procedures performed is less than the scope of those performed in our audit of the financial statements. Management is responsible for the preparation of the other information, including the board report in accordance with Part 9 of Book 2 of the Dutch Civil Code and other information pursuant to Part 9 of Book 2 of the Dutch Civil Code. Report on other legal and regulatory requirements Engagement We were engaged by the audit committee as auditor of Ferrari N.V. on September 29, 2015, to perform the audit of its 2015 financial statements, and have operated as statutory auditor since then. No prohibited non-audit services We have not provided prohibited non-audit services as referred to in Article 5(1) of the EU Regulation on specific requirements regarding statutory audit of public-interest entities. Description of responsibilities for the financial statements Responsibilities of management and the audit committee for the financial statements Management is responsible for the preparation and fair presentation of the financial statements in accordance with EU-IFRS and Part 9 of Book 2 of the Dutch Civil Code. Furthermore, management is responsible for such internal control as management determines is necessary to enable the preparation of the financial statements that are free from material misstatement, whether due to fraud or error. As part of the preparation of the financial statements, management is responsible for assessing the Company’s ability to continue as a going concern. Based on the financial reporting frameworks mentioned, management should prepare the financial statements using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so. Management should disclose events and circumstances that may cast significant doubt on the Company’s ability to continue as a going concern in the financial statements. and appropriate audit evidence for our opinion. Our audit has been performed with a high, but not absolute, level of assurance, which means we may not have detected all material errors and fraud. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. The materiality affects the nature, timing and extent of our audit procedures and the evaluation of the effect of identified misstatements on our opinion. We have exercised professional judgment and have maintained professional skepticism throughout the audit, in accordance with Dutch Standards on Auditing, ethical requirements and independence requirements. Our audit included e.g.,: • Identifying and assessing the risks of material misstatement of the financial statements, whether due to fraud or error, designing and performing audit procedures responsive to those risks, and obtaining audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control • Obtaining an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control • Evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management • Concluding on the appropriateness of management’s use of the going concern basis of accounting, and based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause a company to cease to continue as a going concern • Evaluating the overall presentation, structure and content of the financial statements, including the disclosures • Evaluating whether the financial statements represent the underlying transactions and events in a The audit committee is responsible for overseeing the Company’s financial reporting process. manner that achieves fair presentation 338 339 FINANCIAL STATEMENTS INDEPENDENT AUDITOR’S REPORT To: the shareholders and audit committee of Ferrari N.V. Because we are ultimately responsible for the opinion, we are also responsible for directing, supervising and performing the group audit. In this respect we have determined the nature and extent of the audit procedures to be carried out for group entities. Decisive were the size and/or the risk profile of the group entities or operations. On this basis, we selected group entities for which an audit or review had to be carried out on the complete set of financial information or specific items. We communicate with the audit committee regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant findings in internal control that we identify during our audit. In this respect we also submit an additional report to the audit committee in accordance with Article 11 of the EU Regulation on specific requirements regarding statutory audit of public- interest entities. The information included in this additional report is consistent with our audit opinion in this auditor’s report. We provide the audit committee with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with the audit committee, we determine those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, not communicating the matter is in the public interest. Rotterdam, February 23, 2018 Ernst & Young Accountants LLP /s/ Pieter Laan FERRARI WORLDWIDE Geneva, International Motor Show Frankfurt, International Motor Show Tarragona, Ferrari Land at PortAventura Park Maranello and London, “Under the Skin” exhibition 340 Mugello, Finali Mondiali The 55th Anniversary of the 250 GTO 341 FINANCIAL STATEMENTS FERRARI WORLDWIDE  Geneva, International Motor Show 342 343 FERRARI WORLDWIDE  Frankfurt, International Motor Show 344 345 FERRARI WORLDWIDE  Tarragona, Ferrari Land at PortAventura Park 346 347 FERRARI WORLDWIDE  Maranello and London, “Under the Skin” exhibition 348 349 FERRARI WORLDWIDE  Mugello, Finali Mondiali 350 351 FERRARI WORLDWIDE  The 55th Anniversary of the 250 GTO 352 353 Ferrari N.V. Official Seat: Amsterdam, The Netherlands Dutch Trade Registration Number: 64060977 Administrative Offices: Via Abetone Inferiore 4 I- 41053, Maranello (MO) Italy Ferrari N.V.ANNUAL REPORT2017ANNUAL REPORT 2017Ferrari N.V.Official Seat:Amsterdam, The NetherlandsDutch Trade Registration Number:64060977 Administrative Offices:Via Abetone Inferiore 4I- 41053, Maranello (MO)ItalyFerrari N.V.ANNUAL REPORT2017

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