DUCATI MOTOR HOLDING SPA - 20-F - 20060714 - COMPANY_INFORMATION
Item 4. Information on the Company
History and Development of the Company
We are one of the world’s leading manufacturers of high-performance sport motorcycles. Founded in 1926, we are widely recognized among motorcycle enthusiasts for producing racing-inspired motorcycles characterized by unique engine features, innovative design, advanced engineering and overall technical excellence. With an extensive racing pedigree dating to the 1950s, our motorcycles have dominated the World Superbike Championship, where we have won 13 manufacturers’ titles since 1990 and more single race victories than all other manufacturers combined. In 2003, after an absence of over 30 years, we resumed participation in the MotoGP Championship, placing second in the manufacturers’ ranking of the Championship in 2004; in 2005, we finished third in the manufacturers’ ranking.
We believe that our globally recognized brand, unique product
characteristics and proven racing success provide us with a loyal and enthusiastic customer base and enable us to position our motorcycles as premium price products primarily within the “Sport” sub-segment of the large-displacement motorcycle market.
DMH, which operates under the trademark “Ducati,” was incorporated in Italy on May 29, 1996, as a
società per azioni
, or a company whose capital is represented by shares. Our registered and administrative office is located at Via A. Cavalieri Ducati 3, 40132 Bologna, Italy. Our telephone number at this office is +39-051-641-3111. Our agent in the United States is Ducati North America, Inc. (“Ducati North America”). Ducati North America’s address is 10443 Bandley Drive, Cupertino, CA 95014-1912, and its telephone number is (408) 253-0499.
Our predecessor was founded on July 4, 1926, when Antonio Cavalieri Ducati and his three sons established one of the first companies in Italy to manufacture radios and electrical components. In 1935, Ducati moved his company to a modern, purpose-built factory at Borgo Panigale, outside Bologna, where we manufacture motorcycles today. In 1947, our predecessor began production and distribution of motorcycles, which rapidly developed a reputation for high-performance, technical excellence and racing success. During the 1950s, Ducati manufactured a series of increasingly powerful motorcycles, including a number of models developed by the famous Ducati engineer, Fabio Taglioni. Taglioni adapted for use on motorcycles the Desmodromic valve control system, a signature (although unpatented) Ducati technical feature that can be found on every motorcycle we produce today.
14
As a result of their superior performance characteristics, Ducati motorcycles rapidly achieved success in international racing competitions. A 125cc Grand Prix was runner-up in the 1958 World Championship and the 250cc Mach 1 motorcycle, introduced in 1964, was among the fastest 250cc roadsters available at the time. In 1972, a Ducati 750 GT prototype won a dramatic victory in the Imola 200 race, establishing the reputation of a new Ducati engine for high-performance and racing success. This engine, called the L-twin, was comprised of two cylinders mounted at a 90-degree angle to form a unique L-shaped design, a configuration that, combined with a Formula One-inspired tubular trestle frame, proved successful in racing and in road use. Following the Imola victory, Ducati commenced production of a series of larger displacement motorcycles using the L-twin engine. These
motorcycles formed the foundation of the modern Ducati motorcycle lines and enjoyed a high degree of success on world racing circuits, culminating in Mike Hailwood’s historic 1978 victory on a Ducati 900 Super Sport in the Isle of Man race. Despite its technical excellence and racing success, Ducati’s fortunes declined sharply in the early 1980’s, primarily as a result of the decision by the major shareholder at the time, a state-owned industrial concern, to shift Ducati’s focus to products other than motorcycles, principally small diesel engines.
In 1985, Cagiva S.p.A., an Italian manufacturing conglomerate (together with its subsidiaries, “Cagiva”) acquired the Ducati brand and related business. Cagiva reinvigorated the Ducati brand by refocusing on Ducati’s tradition of building high-performance racing motorcycles. Under Cagiva’s ownership, Ducati motorcycles reinforced their reputation for excellence on and off the racetrack. In March 1987, Marco Lucchinelli triumphed on a Ducati Ottovalvole 851 prototype in the Daytona “Battle of the Twins” competition. In 1990, Raymond Roche rode a Ducati 888 to victory in the World Superbike Championship, the first time a Ducati two-cylinder engine motorcycle successfully challenged a four-cylinder engine produced by our Japanese competitors. Beginning in 1995, however, liquidity problems at Cagiva unrelated to the Ducati motorcycle business
resulted in significant production delays and reduced sales.
In 1996, DMH was formed by a group of investment funds known as Texas Pacific Group (“TPG”) and Deutsche Morgan Grenfell (“DMG”) to acquire the Ducati brand name, trademark and related intellectual property rights from Cagiva. Cagiva contributed the other assets and liabilities associated with the Ducati business to DMH in exchange for shares issued to Cagiva representing 49.0% of DMH’s total issued and outstanding shares. Following these transactions, TPG and DMG indirectly owned, in the aggregate, 51.0% of the shares of DMH. On July 30, 1998, TPG and DMG through their affiliates, together with a third investor, acquired the remaining 49.0% of the shares of DMH owned by Cagiva.
Beginning in late 1996, we successfully implemented a focused turnaround program, which included: restarting the supply process; substantially increasing our investment in working capital to increase production and relaunch our research and development efforts; installing a new management team; rebuilding our sales, marketing and public relations departments and revamping our corporate image; initiating plans to streamline our assembly process; establishing a quality control process; taking control of distribution in key markets; and successfully introducing new models and new versions of our motorcycles.
In March 1999, DMH completed an initial public offering of 90,200,000 shares, of which 17,000,000 shares were issued by DMH and 73,200,000 shares were sold by the selling shareholders in the initial public offering. As a result of the initial public offering, TPG reduced its holdings in DMH from 72.0% to 34.8%. In connection with the initial public offering, our shares were listed on Telematico and our ADSs were listed on the New York Stock Exchange.
15
In April
2001, our shares began trading on the
Segmento Titoli con Alti
Requisiti
(the Segment for Equity with High Standards, or “STAR”)
of Telematico. This segment was created by Borsa Italiana S.p.A. for
small- and medium-sized companies that operate in traditional sectors of the
economy and meet stricter requirements relating to transparency, liquidity and
corporate governance than those usually required for listing on the Telematico
so that such companies can achieve greater market visibility. As part of
the STAR admission requirements, we appointed Mediobanca to act as specialist
for our shares. The specialist is required to take a number of actions
intended to support the market for our shares and to facilitate the
communication of information about us to investors.
On February 28, 2006, TPG Motorcycle Acquisition L.P. (“TPG Acquisition”), a limited partnership that is part of TPG, agreed to sell to Investindustrial Holdings S.A. (“Invind Holdings”) (or companies designated by it) a stake representing 30% less one share of our share capital at a price per share of 0.85 euro. After the designation by Invind Holdings on March 27, 2006, the shares were purchased by WM (24,821,919 shares, equivalent to 15.58% of our share capital), WM II (11,144,047 shares, equivalent to 6.99% of our share capital) and WM III (11,842,044 shares, equivalent to 7.43% of our share capital). For more information about Invind Holdings and WM, WM II and WM III, see “Item 7. Major Shareholders and Related Party Transactions—Major Shareholders.” On April 4, 2006, TPG Acquisition sold its remaining stake in Ducati (approximately 3% of
our share capital) in open market transactions.
Following the purchase by WM, WM II and WM III and in light of negative market developments and unsatisfactory results, our management formulated a three-year business plan, which was approved by our board of directors on April 13, 2006. The primary objective of this plan is to improve our margins and generate cash flow by increasing sales of motorcycles in the high end of our product range and reducing our overhead and operating costs. For a description of the 2006-2008 business plan, see “
–Business Overview
–Business Strategy
–2006-2008 Business Plan.”
As contemplated in our 2006-2008 business plan and approved by the board of directors at its meetings on April 13 and May 4, 2006, we successfully completed an €80,000,000 capital increase in June 2006. This capital increase was achieved through an offering of 160,343,960 subscription rights (representing the right to subscribe for 160,343,960 shares) to shareholders of DMH. From May 8 to May 26, 2006, DMH shareholders exercised a total of 158,579,839 subscription rights and subscribed for the related 158,579,839 shares. The 1,764,121 subscription rights that remained unexercised at the end of this period were sold on the Borsa Italiana between June 5 and June 9, 2006, and the related 1,764,121 shares were subsequently subscribed.
Following the completion of the capital increase, as of June 23, 2006, 320,687,920 of our ordinary shares were outstanding.
Business Overview
We produce motorcycles in six model lines, which vary in their technical and design features and intended customers: Superbike, Super Sport, Sport Naked, Sport Touring, Multistrada and Sport Classic. We sell our motorcycles and related products in 61 countries worldwide, with a primary focus on the Western European and North American markets, which together accounted for approximately 84.0% of our revenues in each of the last two years. In 2005, no single country accounted for more than 15.0% of our revenues from motorcycles and related products, with the exception of Italy, which accounted for 27.8%. The United States and Canada accounted for 18.8% of our revenues from motorcycles and related products. We have a global distribution network directly controlling our Italian sales and operating wholly owned distribution subsidiaries in North America, France, Germany, the
Benelux countries (also responsible for Sweden and Norway), Japan and the United Kingdom. Our manufacturing operations, based in Bologna, Italy, consist primarily of engine and motorcycle assembly and are not vertically integrated, resulting in a relatively low fixed cost structure.
16
Competitive Strengths
We believe that the following competitive strengths should be the basis for our future strategies:
Focused Market Niche Strategy.
Founded in the Ducati racing heritage, our product development effort is primarily focused on racing-derived motorcycles. This focus gives us a strong competitive position in our targeted market niche of high-performance sport motorcycles. We estimate that our worldwide market share in our target market has grown from 4.0% in 1996 to 4.4% in 2005. We remain loyal to our original market for uncompromised, high-performance sport motorcycles, a position recognized by our customers, motorcycle enthusiasts, the press and the industry at large.
Global Brand Strength.
Our well-defined market positioning and unique brand character, combined with the international success of our motorcycles in the World Superbike Championships, the MotoGP Championship and other international racing events, promote awareness of the Ducati brand around the world. The Ducati brand is recognized globally for large-displacement, high-performance sport motorcycles and is associated with innovative design, advanced engineering and racing success. We also reach Ducati enthusiasts all over the world through our website.
Technical Excellence and Performance Superiority.
Ducati motorcycles excel on the racetrack because of their superior handling characteristics and usable power. We believe that our motorcycles have a reputation for advanced engineering and overall technical excellence. This reputation has developed as a result of decades of consistent design and technical innovation at Ducati, including such signature features as the “Desmodromic” valve control system, the “L-twin” engine and the tubular trestle frame.
Strong Manufacturing Fundamentals.
Our manufacturing operations are not vertically integrated and have a relatively low fixed cost structure. We assemble our motorcycles and engines and manufacture only two strategically important components, crank cases and cylinder heads. We also use a relatively large number of key common components, particularly high-cost engine components, and employ flexible production processes that we believe are well suited to our current and anticipated production volumes.
Business Strategy
Our business plan for 2006-2008 and other strategic initiatives to increase our sales and profitability, are described below.
2006-2008 Business Plan.
The 2006-2008 business plan focuses on offering high-end motorcycle models and reducing our overhead and operating costs. The plan also calls for improvements to our production plant and its technological research facilities, as well as to our computerized resource planning system (ERP). The principal strategies outlined in the 2006-2008 business plan are discussed below. For discussion of the financial aspects of the plan and the financial projections contained therein, see “Item 5. Operating and Financial Review and Prospects—Trend Information.”
During the three-year period covered by the business plan, we intend to renovate our product offering by: (i) launching five new models; (ii) continuously renovating existing models; and (iii) eliminating several models that have reached the end of their product lifecycle. We also plan to attract new customers using the Monster 695 as an entry model to Ducati motorcycles. In order to improve the financial capacity of dealers and encourage the launch of new models, the business plan calls for a reduction in the inventory held by our distribution network. As a result of this reduction, we anticipate that sales of Ducati motorcycles will be below the number of motorcycles registered in 2006 and 2007. In addition to this focus on our product offering, the 2006-2008 business plan calls for the reduction of operating costs through the implementation of new global sourcing
policies. These policies are aimed at reducing product costs and improving quality through the careful selection of suppliers. The plan also provides for corporate restructuring in order to reduce personnel costs.
17
We formulated our 2006-2008 business plan, and the forward-looking data it contains, on the basis of certain assumptions about external factors that are beyond the control of our management, as well as assumptions about the feasibility of certain strategic operating measures that management has some ability to control. For a description of the risks relating to the implementation of the 2006-2008 business plan and the uncertainties surrounding the assumptions on which this plan is based, as well as the forward-looking data contained in the 2006-2008 business plan, see “Item 3. Key Information—Risk Factors.”
Other Strategies
In addition to the 2006-2008 business plan, Ducati plans to undertake other strategic initiatives to increase its financial outcome and economic position. These measures are described below.
Maintaining our market position
. We intend to maintain our strong niche position in the “Sport” segment of the >500cc Market, which is due to our great tradition of technical excellence, innovative design, advanced engineering solutions and racing success.
Strengthen our distribution network
. Our distribution strategy is aimed at improving our wholesale and retail distribution networks while increasing our contact with retail customers and better understanding their needs. In carrying out our strategy, we: (i) have taken direct control of distribution in strategic markets by establishing wholly owned sales and marketing subsidiaries; (ii) have appointed new distributors in markets in which we have previously been inactive and evaluate each year whether to further expand our distribution network to new markets; (iii) have implemented regular efficiency controls of our distributors and replace on an on-going basis those under-performing distributors; and (iv) have introduced “Ducati stores” in selected markets throughout the world (160 Ducati stores were open at December 31, 2005, as compared with 151 Ducati stores open at December 31, 2004). We believe that a more efficient
and competitive distribution network will be a key factor driving future increases in our market share.
Strengthen Our
G
lobal Brand
. We intend to continue to pursue a coordinated marketing effort to reinforce the traditional strengths of the Ducati brand and to increase the visibility of the Ducati name. We have adopted internationally uniform corporate logos, graphics and lettering, and marketing and promotional materials and have launched a number of international advertising campaigns, set up the “Ducati Museum” at its headquarters in Bologna, established an official Internet site and organized the World Ducati Week in Bologna in 2004 with more than 45,000 Ducati enthusiasts attending. We also intend to continue to seek to extend media coverage of the Ducati brand beyond the traditional motorcycle sector press. We believe that our marketing strategy will further increase brand awareness and customer loyalty.
Expand Our Product Offering
. We intend to continue to develop and expand our offering of motorcycle-related products. These products include technical riding gear (such as helmets, leather suits and gloves), apparel (such as T-shirts, sweatshirts and leather jackets), performance and custom accessories and a wide range of other merchandise.
Increase Our Production Efficiency
. We are continuing to rationalize our manufacturing processes to reduce complexity and increase production efficiency. In particular, we have continued to refine our production process to increase the use of components common to multiple models and to reduce costs through purchasing leverage and component co-design with key suppliers.
18
Growth of Our Internet Business
. We intend to increase revenue through the on-line sale of Ducati products. We also intend to continue improving the function and content of our website, which is an important means of communication and marketing for us.
Organizational Structure
DMH designs, manufactures and distributes Ducati-branded motorcycles, spare parts and apparel. DMH has six direct, wholly owned subsidiaries engaged in the regional distribution of Ducati motorcycles and other products: Ducati North America, Ducati France S.A.S. (“Ducati France”), Ducati Motor Deutschland GmbH (“Ducati Motor Deutschland”), Ducati North Europe B.V. (“Ducati North Europe”), Ducati Japan Ltd. (“Ducati Japan”) and Ducati U.K. Limited (Ducati U.K.”). In addition, DMH owns Ducati Corse, the Ducati racing subsidiary, as well as Ducati Retail S.r.l. (“Ducati Retail”) and Ducati Consulting S.r.l. (“Ducati Consulting”), all as described in more detail below.
The following chart illustrates our organizational structure as of the date of this annual report, including the country of incorporation of each subsidiary.
19
We renamed our subsidiary Ducati Benelux B.V. as Ducati North Europe as of February 11, 2004.
On April 14, 2004, we formed Ducati Retail, a subsidiary held 99.0% by DMH and 1% by Enrico D’Onofrio, Finance Director of DMH. Ducati Retail makes retail sales of Ducati-branded clothing, accessories, spare parts and other items in areas not covered by the traditional distribution network and also provides mechanic services and sells spare parts.
On May 6, 2004, we formed Ducati Consulting, a majority-owned subsidiary (85% held by DMH, with the remaining interests held by two then-DMH executives and a then-member of DMH’s board of directors) that provides consulting and logistics services to all of the Ducati Group companies, as well as to our suppliers and other manufacturers.
In December 2004, Ducati.Com S.r.l., a subsidiary formed in July 2000 to focus on our internet initiatives, was merged into DMH with the aim of making organization and management more efficient (in particular, in respect of treasury management, legal and administrative functions). As a result of this merger, Ducati Corse, which had been held 99% by DMH and 1% by Ducati.Com S.r.l., became a wholly owned subsidiary of DMH.
Products and Distribution
The World Motorcycle Market
In 2005, total world motorcycle registrations were estimated at 1.2 million units, including all motorcycles and scooters with engine displacements greater than 500cc registered in the United States, Western Europe, Japan and Australia. We view the world motorcycle market as divided into four main segments: motor scooters, off-road motorcycles, road motorcycles with engine displacements of less than 500cc and road motorcycles with engine displacements of 500cc or greater. Other subdivisions of the world motorcycle market exist and there is no universally recognized system for classifying this market.
We believe that the >500cc Road Market may be further segmented into “Cruiser,” “Touring,” “Dual,” “Naked” and “Sport” sub-segments. The Cruiser sub-segment comprises heavy motorcycles with a classic American design typically featuring heavy use of chrome components and twin-cylinder “V” engines. The Touring sub-segment comprises motorcycles designed for comfortable, long-distance travel, while the Dual sub-segment comprises motorcycles designed for on and off-road riding. The Naked sub-segment comprises motorcycles totally or partially without body panels. The Sport sub-segment principally comprises motorcycles built for, or, inspired by, racing.
We currently compete primarily in the Sport sub-segments of the >500cc Road Market.
The Sport sub-segment is divided into four main groupings: Superbike, Sport Naked, Super Sport and Sport Touring. Superbike motorcycles are racing-derived and equipped with the most powerful engines and the latest technical advances and are targeted at riders desiring a bike that is similar to those used on international professional racing circuits. Sport Naked motorcycles are principally characterized by the absence of fairing so as to leave the engine exposed and reduce overall weight of the motorcycle. Super Sport motorcycles feature classic design and are targeted at riders interested in balancing horsepower with greater rideability. Sport Touring motorcycles combine the engine power of motorcycles in the Sport sub-segment, with the long-range driveability and features of Touring motorcycles, and are targeted at customers who are interested in comfortable, one- or
two-rider bikes for traveling over relatively longer distances.
20
Motorcycle Lines
We manufacture and distribute six high-performance lines of motorcycles across the Naked, Sport and Dual sub-segments of the >500cc Road Market: Superbike, Super Sport, Sport Naked, Sport Touring, Multistrada and Sportclassic. Motorcycle sales accounted for 77% of our revenues in 2005, as compared to 79% in 2004 and 81% in 2003. We manufacture multiple models within our six product lines, which are differentiated primarily by their engine capacity, fairing and color schemes.
All of our motorcycles share several design features that are closely associated with the Ducati brand and serve to distinguish Ducati motorcycles from those of our competitors. All Ducati motorcycles are equipped with the Desmodromic valve control system, a dual camshaft mechanism that we believe allows more precise control of engine valves than traditional spring-based systems, improving power output and overall engine efficiency. The Desmodromic system, which is not patented, eliminates “valve float” that can occur at very high engine speeds, thereby improving engine “breathing” and increasing engine performance. The Desmodromic system also delivers power more smoothly over a broader revolutions per minute (“rpm”) range than traditional engines, which endows Ducati’s two-cylinder engines with a key benefit of four-cylinder units — namely
consistent, usable power. Ducati motorcycle engines are also built to the unique L-twin design, comprising two cylinders mounted at a 90-degree angle, a configuration that we believe allows for lighter weight and improved aerodynamics over the four-cylinder configurations of our competitors. As a result of the engine design and the Desmodromic system, all Ducati motorcycles produce a deep, resonant engine sound that is a noted Ducati characteristic.
In addition, all Ducati motorcycles employ the tubular trestle frame traditionally associated with Ducati motorcycles. We believe that the tubular trestle frame, which is inspired by Formula One automotive racing technology, increases the rigidity and strength of our motorcycles and allows for a more compact design architecture that facilitates greater speed and more precise handling. We believe that these features, among others, contribute to the superior and distinctive performance of our motorcycles. As part of our business strategy, all motorcycle models introduced in the future will likely maintain these signature technical characteristics.
Although they share the common characteristics described above, our individual product lines are distinguished by the following features:
Superbike.
The Superbike is closely derived from the Ducati motorcycles currently competing in the World Superbike Championship. Since the introduction of the first Ducati Superbike, the 851, in 1987, we have continuously upgraded the technology and power of this motorcycle. The 851 was based on custom-built championship racing bikes modified to meet government safety and noise standards. With the success of the 851, we extended the Superbike range to include the 916 and the 748, introduced in 1993 and 1994. The 916 won several worldwide awards, including four “motorcycle of the year” awards from Motor Cycle News (“MCN”) magazine. For model year 1999, we launched the 996 to replace the 916. The 996 features a 996cc liquid-cooled, four-valve twin engine. For model year 2000, we introduced two new versions of the 748 Superbike,
one with a more powerful engine and another in a special racing version. For model year 2001, we introduced the 996R Testastretta (meaning “compact head”), which features a 998cc engine. For sale in model year 2002, we launched the 998R Testastretta, a radically redesigned Superbike that offers a more powerful engine and is more aerodynamic that its predecessors. The 998R Testastretta was nominated “Sports Motorcycle of the Year” by German magazine Motorrad, Europe’s leading motorcycle publication. For model year 2003, we launched the new 999, a radically redesigned Superbike with an improved Testastretta series engine, which is lighter and more aerodynamic than its predecessors. For model year 2004, we launched the 749R, with a Testastretta series engine and chassis specifically developed to ensure top competitiveness on the racetrack. The 749R completes the Superbike range and marks Ducati’s return to the World Supersport
Championship. All Superbike motorcycles can reach speeds in excess of 250-270 kilometers (155-170 miles) per hour and have a compact design and slim silhouette designed to provide superior handling at such speeds.
21
For model year 2005, the Superbike family received a facelift which included a new front fairing, new side fairing and front shield and a new mudguard. With regards to technical changes, the 999 model received an upgraded engine, previously only mounted on the 999S, while the 999S received an upgrade in its suspension system. We sold 6,094 Superbike motorcycles in 2005, representing 17.6% of total units sold and 27.8% of total revenues from motorcycles, compared to 10,213 Superbike motorcycles in 2004, representing 27.9% of total units sold and 40.6% of total revenues from motorcycles. The decrease in revenues of Superbike motorcycles is attributable primarily to the decrease in sales in the low end of the range of this product line, in particular the 749 model, and to the absence of the 998 Final Edition model, which was sold only in 2004.
Super
Sport.
Our Super Sport motorcycles are characterized by their light
weight, superior handling and tight cornering ability, as well as by their
classic design and engineering features. Ducati Super Sport motorcycles
are fitted with our traditional two-valve twin engine, nicknamed the
“Pompone” (which means “strong pump”) by Ducati enthusiasts,
and are aimed at riders that prefer improved handling and smooth power delivery
to maximum horsepower. Ducati launched its first Super Sport motorcycle in
1973. Over two decades, the Super Sport line has undergone a series of
design and technical updates while retaining its essential
characteristics. In April 1998, we launched a new model in the Super Sport
line, the 900SSie, for sale the following year. In January 2000, we sold
2000 units of the limited edition MH900
evoluzione
exclusively
over the internet (all of which were delivered by the spring of 2003). In
addition, we launched a 750cc version of the 900SS for model year 1999 and, for
2001 and 2002, respectively, we launched new, matte black versions called the
750 and 900 Sport.
For model year 2003, we introduced a 620cc
version and upgraded the 750cc and 900cc engines of our Super Sport motorcycles
to 800cc and 1000cc dual spark engines, which have two spark plugs per cylinder,
offering extra reliability, increased power and lower emissions. However,
for model years 2004 and 2005, following a decline in demand and sales volumes
for this line, we eliminated all models in this line other than the
1000cc. We sold 1,030 Super Sport motorcycles in 2005, representing 3.0%
of total units sold and 2.5% of revenues from motorcycles, compared to 1,426
Super Sport motorcycles in 2004, representing 3.9% of total units sold and 3.0%
of total revenues from motorcycles. The decrease in revenues of Super Sport
motorcycles is attributable primarily to the mature stage in the product
lifecycle of the models in this product line.
Sport Naked (or “Monster”).
The motorcycles in the Sport Naked – or Monster – line are designed for the urban rider seeking superior bike performance. The principal design characteristic of the Monster is its total absence of any fairing so as to leave the engine exposed and reduce the overall weight of the motorcycle. The Sport Naked line was launched in 1993 and was an immediate success. The Monster 620 i.e., featuring unusual lightness and an engine with electronic injection, was introduced in 2001 to renovate the Monster 600. In 2003, we further updated the engines in the Monster bikes by introducing the 800cc and 1000cc to replace the previous 750cc and 900cc. The Monster line was subsequently expanded to include new models designed to meet special market needs: the Monster Dark and the Monster S4 model with a 916cc engine. The
Monster S4R was also subsequently introduced with the 996 Desmoquattro water-cooled engine taken from the competition 996, which is the most powerful engine ever made, and a frame modified to radically differentiate the it from the Monster S4. At the end of 2004, the S2R was launched with the 800cc engine originating directly from the Monster S4R. The S2R 1000 model, the sporty and powerful model in the SR series, was presented in September 2005 and followed by the S4Rs Testastretta and Monster 695 in early 2006. The S4Rs Testastretta boasts a more powerful engine resulting directly from our experience in the Superbike World Championship, and the Monster 695 is an evolution of the basic 620 version. We sold 16,585 Sport Naked motorcycles in 2005, representing 48% of total units sold and 38.7% of total revenues from motorcycles, compared to 18,027 Sport Naked motorcycles sold in 2004, representing 49.3% of total units sold and 37.8% of total revenues from motorcycles. The
decrease in revenues of Sport Naked motorcycles is attributable primarily to the drop in sales of the M620 and S4R models, which was partly set off by the success of the new S2R model, which recorded sales of more than 9,700 units in 2005.
22
Sport Touring.
Our Sport Touring line serves a group of consumers who desire the speed, handling and styling of a Ducati, but prefer a more comfortable ergonomic configuration for longer rides. In addition, the ST2 has a more comfortable second seat to accommodate a passenger and is equipped with two side bags. We introduced the Sport Touring line in April 1997 with the ST2, which won the 1997 MCN magazine “Sport Tourer of the Year” award. For model year 1999, we launched the ST4, a more powerful and technically advanced four-valve per cylinder version of the ST2. For model year 2001, we introduced the ST4S with a 996cc engine, and for model year 2002, we introduced a version with an Anti-lock Brake System (ABS). For model year 2004, we launched the ST3, which features a new three-valve engine. For model year 2005, we made only minor adjustments
to the Sport Touring family, such as a new, easier-to-use wet clutch and an additional available color, black. We sold 1,397 Sport Touring motorcycles in 2005, representing 4% of total units sold and 4.5% of total revenues from motorcycles, compared to 2,996 Sport Touring motorcycles in 2004, representing 8.2% of total units sold and 8.1% of total revenues from motorcycles. The decrease in revenues of Sport Touring motorcycles is attributable primarily to reduced sales of the ST3, whose launch in 2004 had generated high demand among dealerships and retail customers.
Multistrada.
In September 2001, we first showed a prototype of our fifth family of motorcycles called the Multistrada. The first model, the Multistrada 1000 Dual Spark, went into production in April 2003. The motorcycle is a multipurpose sportsbike offering Superbike performance in a more comfortable design with a more upright position and a new dual spark, air-cooled 1000cc engine. Following the success of the initial Multistrada model, 2005 saw the introduction of a smaller version equipped with a two-valve 620cc engine, as well as an improved 1000 version with an upgraded suspension system and higher quality components. In addition, smaller technical changes were made in an effort to further improve overall comfort and versatility. We sold 6,156 Multistrada in 2005, representing 17.8% of total units sold and 15.8% of total revenues from motorcycles, compared to
3,898 Multistrada in 2004, representing 10.7% of total units sold and 10.5% of total revenues from motorcycles. The increase in sales of the Multistrada motorcycles in 2005 as compared to 2004 was primarily attributable to the introduction of the new MTS 620 and MTS 1000S models.
Sport Classic.
We presented the prototypes of the Sport Classic, our sixth line of motorcycles, to the press and public in October 2003. This motorcycle line, which is reminiscent of classic Ducati motorcycles but features today’s technology, was conceived and developed based on online research of the interests of Ducati’s fans. The first Sport Classic is the Paul Smart 1000 Limited Edition, which went into production in September 2005. This motorcycle, featuring front and rear Ohlins suspension and painted in the silver and green color scheme similar to the original Ducati 750 Super Sport, is inspired by the bike that Paul Smart rode to victory in the Imola 200 race in 1974. It shares the same technology as our other motorcycles, distinguishing itself by its 1970’s look. The Paul Smart 1000 was followed by the 1000 Sport and the 1000 GT, which
went into production in October 2005 and in April 2006, respectively.
The gross profit (in thousands of euro) and the gross profit margin (in percent) for the years 2004 and 2005 for each of our motorcycle lines is listed below. The gross profit margin is a percentage calculated by dividing gross profit by related revenues:
Year Ended December 31,
2004
Gross Profit
2005
Gross Profit
€/000
%
€/000
%
Superbike
25,465
22.0
12,691
18.5
Super Sport
881
10.2
77
1.3
Sport Naked
10,988
10.2
-359
-0.4
Sport Touring
3,215
14.0
965
8.6
Multistrada
4,275
14.3
-114
-0.3
Sport Classic
—
—
5,144
19.5
Total Motorcycle Product Lines /Average
44,824
15.8
18,404
7.4
Total Gross Profit/Average
86,651
23.8
58,455
18.2
23
The current suggested retail prices in Italy for our motorcycles range from €6,995 for the Monster Dark 620cc motorcycle to €30,000 for the Superbike 999R. Each Ducati motorcycle sold is covered by a two-year warranty.
In addition to these six motorcycle lines, we manufacture custom racing motorcycles for our official teams, as well as for private race teams, professional riders and racing enthusiasts who compete without direct factory support. We sold 12 custom racing motorcycles in 2005, 14 in 2004 and 18 in 2003. We continue to believe that selling racing motorcycles serves to reinforce Ducati’s reputation as a leader in high-performance motorcycle technology. The design and manufacturing of racing motorcycles allow our experienced research and development team to test new technical innovations and design features.
Motorcycle-Related Products, Services and Licensing
In addition to our high performance motorcycles, we offer spare parts, Ducati Performance accessories, technical riding gear and enthusiast apparel and merchandising. We also organize a number of events to encourage fans to join the World of Ducati, such as riding schools, classic rallies around Italy, online competitions, and Ducati tour and rental programs.
Spare Parts.
We produce spare parts to service Ducati motorcycles in circulation. We have outsourced the physical movement and storage of our spare parts in Europe to Saima Avandero S.p.A., an Italian logistics company. We manage our spare parts catalogue and order processing electronically.
“Ducati Performance” Accessories.
A popular trend among many Ducati owners is to replace motorcycle components with custom-made accessories to increase the individuality of their motorcycles. We currently design and distribute a wide range of Ducati parts and accessories (some of which are approved only for racing use) under the “Ducati Performance” trade name, including custom-painted gasoline tanks, specialized exhaust systems, fenders, fairings and carbon fiber parts and accessories.
Technical Riding Gear and Enthusiast Apparel.
Ducati entered into collaboration and supply agreements with leading companies in the motorcycle apparel sector, including Dainese and Suomy, to develop a line of apparel with the Ducati trademark. The line includes jackets, suits, gloves, boots, helmets and protective garments, in addition to other sport wear. The Company also markets a line of products of motorcycling enthusiasts, including T-shirts, caps and other items. These articles are all sold through the Ducati distribution network and in Ducati Stores. The same products are also sold at stores at the Ducati museum, the Bologna airport and the Ducati Factory Outlet at Borgo Panigale through the Ducati Retail subsidiary company. Furthermore, in line with our strategy to expand into new selected markets, in April 2005 we announced our entry into the Chinese
market through a long-term partnership agreement with a Chinese company that has started to distribute Ducati articles of clothing through a newly opened store in Shanghai.
24
Licensing.
We license the Ducati trademark and other trademarks to leading companies selected to manufacture and sell products inspired by the world of Ducati motorcycles. We have entered into a number of contracts with companies working in various sectors, including publishing, apparel and accessories, perfumery, models, stationery and school supplies, toys and videogames. We have entered into an agreement with the licensee of the “Ermenegildo Zegna” trademark for the production and sale of a Zegna-Ducati fragrance; with the holder of the Costume National trademark for production of the “C’N’C’” line, which is designed for the urban rider; with Tumi Inc. to create a collection of luggage and accessories bearing the “Ducati” and “Ducati Corse” trademarks; with Rockstar Games NYC for the creation of videogames; with Ride Now
Motorcycle Tour Operator to organize motorcycle trips and outings under the name “Ducati Tours”; with Oakley Sales Corp. for the production of Oakley eyewear bearing the Ducati trademark; with the holder of the CHICCO trademark, Sonic International Toys Ltd., Maisto (May Cheong Toy Products Ltd.), New-Ray Toys Development Ltd., Paul’s Model Art Gmbh, Peg Perego S.p.A. and Italeri S.p.A. to manufacture toys and models bearing the Ducati trademark; with Ediciones Altaya S.A. and Hachette Fascicoli S.r.l. to produce publications on Ducati motorcycles; with Accademia S.r.l. and Aquila Brand S.p.A. to manufacture stationery and school products with the Ducati trademark; and with Vir2 Studios LLC and Spike CO Ltd. for the production of videogames in which images of Ducati motorcycles are used and reproduced. These licenses are intended to increase awareness of the Ducati brand and to provide an expanded source of revenue.
Events and services.
A small part of our income is related to events that we organize to encourage fans to join the World of Ducati, such as riding schools, classic motorcycle rallies around Italy, online competitions and Ducati promotional tours. See “—Marketing activities.”
The gross profit (in thousands of euro) and the gross profit margin (in percent) for the years 2004 and 2005 for our motorcycle-related products, services and licensing is listed below. The gross profit margin is a percentage calculated by dividing gross profit by related revenues.
Year Ended December 31,
2004
Gross Profit
2005
Gross Profit
€/000
%
€/000
%
Motorcycle-Related Products, Services and Licensing
41,827
53,1
40,051
54.4
Total Gross Profit/Average
86,651
23,8
58,455
18.2
Market Share and Competition
We compete primarily in the Sport sub-segment of the >500cc Road Market. Our principal competitors are four Japanese manufacturers (Honda, Suzuki, Yamaha and Kawasaki), two European manufacturers (BMW and Triumph) and, to a more limited extent, Harley-Davidson of the United States. Harley-Davidson’s Buell subsidiary produces motorcycles that compete with our Sport Naked motorcycles.
Our Japanese competitors are generalist manufacturers competing in all segments of the motorcycle market, from scooters to large-displacement off-road and on-road motorcycles. BMW and Triumph manufacture motorcycles for various sub-segments of the >500cc Road Market. Like Ducati, Harley-Davidson focuses on a niche market, in particular the Cruiser sub-segment of the >500cc Road Market, although it also has a limited offering of Sport Naked motorcycles through its Buell subsidiary.
Worldwide registrations of Ducati motorcycles were 35,887 in 2004 and 34,631 in 2005. The historical worldwide trend of Ducati registrations can mask significant regional variations. From 2004 to 2005, Ducati registrations increased significantly in the United States (up 26%) and Spain (up 43%) and more modestly in those countries not served by commercial subsidiaries (up 4.5%) and France (up 1.5%), and decreased in Germany (down 15%), Japan (down 5.5%), the Benelux countries (down 17%), the United Kingdom (down 16%) and Italy (down 15%). For a discussion of the relationship between registrations and retail sales, see “Item 5. Operating and Financial Review and Prospects —Introduction.”
25
Honda, Suzuki, Yamaha and Kawasaki all have substantially greater worldwide market shares than we do. Based on available registration data, we estimate that these companies had approximately the following market shares of the Sport segment of the >500cc Road Market worldwide in 2005:
2005 worldwide %
of Sport sub-segment
of >500cc Road Market
Company
Suzuki
25.1
%
Honda
19.9
%
Yamaha
18.6
%
Kawasaki
14.0
%
We estimate that Triumph and BMW have a market share of approximately 3.2% and 9.1%, respectively.
Our market share varies among our motorcycle lines comprising the Sport sub-segment of the >500cc Road Market. In 2005, we estimate that we had approximately a 2.8% global share of our historical core market for Superbike and Super Sport motorcycles, as compared to 3.7% in 2004, reflecting the fact that we did not launch any new Superbike nor Super Sport models in 2005, and approximately a 6.1% global share of the market for Naked motorcycles, compared to 6.4% in 2004, reflecting increased competition from new models launched by our Japanese competitors. We estimate that we had approximately a 5.9% global share of the market for Sport Touring motorcycles in 2005, compared to 7.4% in 2004, decreased demand for the ST3 model following its launch in 2004. We estimate that we had approximately a 3.9% global share of the market for dual motorcycles in 2005, compared to 2.8% in 2004, due to
the success of the new models introduced in the Multistrada family.
Our market share also varies significantly across geographical areas. We estimate that we had the following market shares in 2005 in markets in which we have a commercial subsidiary: 8.5% in Italy, 3.4% in the United States, 4.5% in Japan, 2.8% in Germany, 4.0% in France, 3.3% in Great Britain, 5.1% in the Netherlands and 6.0% in Belgium.
Unit sales showed varying trends in our principal geographic markets, with increases in the United States (up 33.4%), Japan (up 9.7%) and France (up 9.3%), substantially unchanged sales in Germany (up 0.3%) and decreases in the countries served by importers (down 4.5%), the United Kingdom (down 6.9%), the Benelux countries (down 16.3%) and Italy (down 27.4%).
Market estimates in this annual report are based on our analysis of registration data obtained from published sources, as well as of our internal dealer data and surveys commissioned by us. See “Presentation of Financial and Other Information,” at the beginning of this annual report.
The following
table gives a breakdown of the revenues from motorcycles and related products in
our principal markets in the last two financial years:
Year Ended December 31,
2004
2005
(euro amounts in thousands)
Italy
120,070
33.1
%
89,075
27.8
%
United States
56,051
15.4
%
60,168
18.8
%
Germany
27,284
7.6
%
22,936
7.1
%
Japan
26,364
7.3
%
27,227
8.5
%
United Kingdom
23,370
6.4
%
19,498
6.1
%
France
29,507
8.1
%
30,788
9.6
%
Other foreign countries
80,713
22.1
%
71,155
22.1
%
Total
363,359
100
%
320.847
100
%
26
Seasonality of Our Business
Worldwide motorcycle sales and registrations are seasonal, peaking during March through May and April through June, respectively. During 2005, we recorded 59.6% of our revenues during the first six months of the year. Our motorcycle production levels are relatively stable throughout the year (excluding annual shutdown periods for the month of August and the last two weeks of December). Consequently, we experience periods of inventory build up from September through February in anticipation of the spring selling season. Depending on market conditions and our commercial strategy, the level of inventory we hold or sell to importers and dealers at any time may change, as a result of which unit sales may be less seasonal than registrations.
Product Research and Development
The fundamentals of our product development include technical excellence, consistent use of Ducati’s “signature features,” styling and continual innovation. We believe that we can continue successful product development by leveraging an experienced engineering team, which spans three generations of engineering talent dating back to the Taglioni era, with recently acquired state-of-the-art technology.
Since 2003, our policy regarding research and development has been marked by continuity, consisting of studies and design activities aimed at acquiring knowledge and tangibly applying it to the creation and implementation of new products and to the technological improvement of existing products.
As part of our research and development program, we have adopted the following strategies: reducing, through the use of innovative materials, the weight of our motorcycles in order to reduce fuel consumption and polluting emissions, while at the same time increasing safety standards; improving the aerodynamics of our motorcycles in order to reduce fuel consumption and polluting emissions, while preserving the characteristic style and design that distinguish the Ducati brand; improving engine performance, while at the same time achieving a reduction of the noise level of fuel feed and exhaust systems; and researching new technical solutions relating to motorcycle bodies and engines in order to improve performance.
As part of our research and development program, we have entered into two research and development contracts with our subsidiary Ducati Corse. These contracts deal specifically with the development of technical solutions for racing activities that can also be used for the production of Ducati motorcycles intended for retail sale.
In 2005, our research and development expenditures (capitalized and expensed) were €26.5 million (as compared to €19.3 million in 2004).
In connection with our research and development activities, we also received capital grants totaling approximately €3.7 million and subsidized loans for a total amount of approximately €9.6 million from the Italian Ministry for Productive Activities during 2004 and 2005. These loans have a five-year term starting at the time of final approval of the technical and financial statements presented with regard to the period of validity authorized for each project. These loans are found in a “pre-amortization” phase from the date of disbursement until the date of final approval of the technical and financial statements, generating interest payable for the Company but not the obligation repay the principal.
27
Distribution
Distribution is a key element of our business and is crucial to increase market share and profitability. Historically, Ducati distributed its motorcycles in Italy directly, through a network of retail dealers (typically multi-brand dealers), in the United States through a wholly-owned subsidiary and abroad through a series of independent distributors, each responsible for establishing its own network of retail dealers. Dealers outside Italy and the United States would contract with a distributor rather than with Ducati. In 1997 we implemented a distribution strategy aimed at both improving our wholesale and retail distribution networks and increasing our contact with, and understanding of our retail customer. To achieve these objectives, we acquired direct control of wholesale distribution in strategic markets by forming wholly owned subsidiaries in charge of sales and marketing,
replaced certain wholesale distributors whose results were unsatisfactory and began commercial relationships with distributors in markets in which we were previously not present. We also launched a restructuring of our dealer network in Italy and backed the opening of “Ducati Stores” in selected markets throughout the world.
Wholesale Distribution.
Our wholesale distribution model is based
primarily on forming wholly owned distribution and sales subsidiaries, and we
now have wholly owned subsidiaries for the United States and Canada, France,
Germany, Belgium, Netherlands, Sweden, Norway, Japan, United Kingdom and
Ireland. The establishment of additional wholly owned subsidiaries has a
number of important benefits, including (i) acquisition of profits that had
previously been earned by the independent distributors; (ii) formation of a
closer relationship with consumers, allowing us to better understand the needs
of our consumers and the motorcycle market in general; (iii) increased control
over the distribution process and more effective and coordinated marketing
activities; and (iv) because motorcycles are stored at, and shipped directly
from, our factory to retail dealers or distributors (except for the United
States and Japan), enhanced ability to redistribute inventory among various
markets and to meet demand peaks for the various models while reducing overall
logistical costs.
We sell our products through independent distributors in countries in which we do not have a wholly owned subsidiary. We are normally bound to these distributors by exclusive distribution agreements, pursuant to which we grant the distributor exclusive rights to distribute Ducati products in the relevant territory. The importer in turn undertakes (i) not to sell Ducati products outside the assigned territory; (ii) not to compete with Ducati by manufacturing or selling competing products, unless permitted by contract; (iii) to reach defined sales goals; and (iv) to provide Ducati with data concerning sales to dealers and retail customers, the official registration data in the relevant territory and information about trade policies and market data. We continue to appoint new distributors in markets in which we have previously been inactive, and evaluate each year whether to further expand
our distribution network to new markets.
Retail Distribution.
We intend to organize our retail distribution network around a centralized direct control hub in all countries where we are currently present and to expand our retail distribution network range of action abroad.
In Italy, we have restructured our retail distribution network, reducing the number of Ducati dealers, from 165 in 1996 to 64 in December 2005, while offering enhanced marketing and merchandising support. The enhanced support for these activities is designed to encourage dealers to invest in and transform their dealerships into Ducati Stores, following the model discussed below. This strategy is intended for our benefit and for the benefit of the dealers. The dealers benefit from increased sales volume and improved profitability while we expect to benefit from a stronger and more uniform retail sales network for our motorcycles and other products. This restructuring in Italy has also contributed to boosting sales and profits in Italy. Based on this success in Italy, we have decided to adopt a similar model in foreign markets as well, commencing with in France, Germany and
Japan. For geographic reasons, we have adopted a different strategy in the United States aimed at strengthening our wholesale distribution network. As of December 31, 2005, there are approximately 800 Ducati dealers in operation around the world.
28
Our relationships with Italian dealers are currently governed by standard contracts based on partial exclusivity and multi-brand arrangements. Under these agreements, the dealer is awarded the right to distribute to a pre-determined number of parties within a given territory in exchange for its undertaking not to make or sell competing products and guarantee that certain sales volumes will be attained. We are entitled to examine each dealer’s book and records regarding Ducati products in order to monitor the dealer’s efficiency and compliance with the terms of the distribution agreement.
Finally, we have developed a special design concept for dealers wanting to open Ducati Stores in selected markets around the world. The Ducati Stores are centered on the Ducati brand and offer a customized and characteristic retail space as well as a high level of service and technical support. Ducati motorcycles are the primary focus in the Ducati Stores and are supported by displays of Ducati Performance spare parts and accessories and the Ducati line of apparel. In some Ducati Stores a “History Wall” displays images of Ducati’s racing heritage and an “Engineering Wall” shows a large-scale engineering drawing of the 916 Superbike. We provide Ducati Stores with a specialized design consultancy service but do not own any direct interest in the stores; Ducati Stores are operated pursuant to franchising agreements. As of December 31, 2005, approximately
160 Ducati Stores are in operation around the world, 49 of which are in Italy.
Marketing Activities
While Ducati is fundamentally a motorcycle manufacturer, we are also the custodian of a valuable global brand.
Brand Development.
We hold several important trademarks, including the world-famous “Ducati” trademark. As early as 1996, we hired communication, public relations, advertising and marketing specialists and centralized coordination of marketing activities at our headquarters in Bologna. In 2003, we created a dedicated marketing department within DMH to improve the organization and management of on-line, as well as traditional, marketing activities. The department works to develop strategies to meet the needs of the growing number of Ducati fans around the world. In 2004, we re-launched our “Ducati People” global advertising campaign (launched initially in 1998) with Ducati Club members cast in the spotlight. The campaign is intended to communicate the authenticity and uniqueness of the Ducati brand.
Since we attract media attention through our international racing activities and product innovations, our marketing strategy does not require large investments in advertising. The primary source of advertising comes from Ducati motorcycles on racing circuits around the world and articles published in a broad range of motorcycle publications. Thanks to the strength of the Ducati brand, media coverage of Ducati extends beyond the traditional motorcycle press. Articles featuring Ducati have appeared in the financial sections of
Financial Times,
Forbes
,
The Wall Street Journal
and
Barron’s
, and features dedicated to Ducati have also appeared in Vogue and on CNN, CNBC and Bloomberg Television. Ducati enthusiasts, including Formula One drivers, models, international athletes and film. celebrities, have also contributed to our brand’s fame and
dissemination.
We intend to continue taking part in initiatives that support the Ducati brand in the world of art, design and fashion. Ducati motorcycles were recently used for the advertising campaigns of a large number of fashion designers, including Versace, Dior and Donna Karan, and a Ducati motorcycle was used in shooting the films “Matrix Reloaded” and “Catwoman.”
29
We have also sponsored the
Motogiro d’Italia
, a historical motorcycle rally that takes place along the picturesque roads of Central Italy, since its revival in 2001. Participants ride motorcycles produced before 1957, the last year of the original
Motogiro
, as well as other recent motorcycle models, primarily Ducati. The event has drawn enormous media interest and has attracted hundreds of enthusiasts and journalists from the world over. Another marketing activity, which began in 2003, is the
Centopassi
, a competitive motorcycle tour in which participant Ducati owners and enthusiasts challenge Ducati test riders on the new Multistrada on the roads of the Italian Alps. A final marketing activity is the World Ducati Week, which has become an important event for Ducati enthusiasts. The third World Ducati Week, in May 2004, attracted more than 45,000
Ducati enthusiasts from 30 countries to the Misano Adriatico racetrack.
On March 18, 2002, Ducati entered into an agreement with Linea S.p.A. to launch the Ducati Desmo Finance Program in support of its sales activities in Italy. The agreement concerns (i) consumer financial services for purchasers of Ducati products; (ii) financial services for Ducati retail stores and dealers, and (iii) the issue and management of credit cards bearing the Ducati trademark. The agreement has been renewed until August 31, 2006, awaiting the result of negotiations for a new joint venture for the supply of the same financial services, which should be jointly formed and owned by Ducati and Linea S.p.A.
Racing.
The performance of Ducati motorcycles on international racing circuits helps sustain high demand for Ducati products. Participation in racing increases visibility of Ducati motorcycles through media coverage of the races and serves as a practical demonstration of the high-performance characteristics of Ducati motorcycles. Our racing activities also support our research and development activities, as many innovations developed for, and implemented in, racing motorcycles are later introduced in the production of Ducati motorcycles intended for the retail consumer.
Ducati motorcycles compete with official teams in the MotoGP World Championship, the Superbike World Championship, the Supersport World Championship and the AMA Superbike Championship (U.S.-based). We made our return to the MotoGP World Championship in 2003 after an absence of more than 30 years, and have been rewarded with a second place finish in the manufacturers’ ranking in the 2004 season and a third place finish in the manufacturers’ ranking in the 2005 season. Loris Capirossi and Sete Gibernau are competing with the new GP6 in the 2006 season. We compete in the Superbike World Championship with our official Ducati teams and by selling motorcycles to other private teams. Since 1990 we have won more single race victories than all other manufacturers combined and a total of 13 manufacturers titles.
The Superbike World Championship and the AMA Superbike Championship require participation using motorcycles derived from roadsters (also called “current production models”). They are converted for racing through a series of modifications allowed by the relevant regulations, which require, however, that the design and basic technical features remain unaltered. Regulations in force in the MotoGP World Championship for the 2006 season require that prototype motorcycles be used (use of basic components of current production motorcycles is prohibited). These prototype motorcycles must be equipped with 4-stroke engines up to 990cc in size and with fuel tanks having a maximum capacity of 22 liters. Starting with the 2007 season, the maximum piston displacement is expected to be lowered to 800cc, with the concomitant reduction of the maximum fuel tank capacity to 21 liters, in an
effort to limit excessive improvement in performances.
Ducati Corse, our subsidiary dedicated to racing activities founded in January 1999, manages the activities of the Ducati racing teams and designs and manufactures motorcycles and engines exclusively for racing use. Ducati Corse also locates sponsors and engages in marketing and promotional activities designed to increase awareness of the Ducati brand.
Sponsors of the Ducati racing team participating in the MotoGP World Championship include: Charles Stewart & Company Limited (displaying the Marlboro trademark); Telecom Italia S.p.A. (displaying the Alice trademark); Binda S.p.A. (displaying the Breil trademark); and Fiat Auto, S.p.A. (displaying the Alfa Romeo trademark). Sponsors of the Ducati racing team participating in the Superbike World Championship include Binda S.p.A. (displaying the Breil trademark); Xerox Ltd.; and Fiat Auto, S.p.A. (displaying the Alfa Romeo trademark). Ducati Corse has also entered into a sponsorship and technical partnership agreement with Shell International Petroleum Company Ltd. (“Shell”) pursuant to which Shell sponsors Ducati’s participation in the MotoGP World Championship and the Superbike World Championship and undertakes to supply fuel and lubricants developed and produced
specifically for the world of racing.
30
In December 2005 Ducati Corse entered into a contract with D’Antin Pramac S.r.l (“D’Antin”), pursuant to which Ducati Corse has agreed to supply D’Antin motorcycles, engines and spare parts, in addition to technical support, so that D’Antin can take part in the MotoGP World Championship with a satellite Ducati Corse team called “D’Antin Pramac.” D’Antin has undertaken to participate in all of the MotoGP World Championship races during the 2006, 2007 and 2008 seasons with two riders and allows D’Antin to renew the contract for the 2009 season.
Internet
. The Internet represents our most important tool of communication with Ducati enthusiasts and customers, as well as a vital element for innovating corporate processes and brand recognition. Re-launched in 2000, the website www.ducati.com today receives more than 9,200,000 visitors from all over the world (150,000 of which are registered users), who in 2005 viewed approximately 217 million pages. With 15 gigabytes of data, texts and images, the website offers complete information about all of the models the Ducati Group makes, constant coverage of the race activities in the various national and international championships, news about all events and initiatives of interest for its fans and Ducati clubs around the world. It also provides information about the network of dealers and Ducati branches in the world, and various features of interest for all riders and those who
aspire to become such. More than 1500 garments, accessories and
merchandising items bearing the Ducati trademark are in the extensive on-line
store catalogue. Moreover, on-line sales of limited edition motorcycles,
such as the MH900e, 996R and 998S Bayliss, have made the Ducati web site one of
the greatest e-commerce successes anywhere in Italy and around the world.
Of the web site’s visitors, 40% are in the United States, 43% in Europe
(mainly Italy), and the remaining 16% are in Japan and other Asian
countries. The enthusiasm and support of its community of fans enabled
Ducati.com to win the prestigious WWW2004 award in 2004 as the best Italian
Internet site in the Automotive and Engines category, according to
Il Sole 24
Ore
. In order to achieve an even closer relationship with its fans
around the world, in 2006 the Company also launched a “blog” (on-line
diary) on its web site managed by Chairman of the Board and CEO Federico Minoli,
where he communicates with the web site’s visitors and describes, in
person, the news regarding Ducati’s activity around the world.
Production
Our manufacturing operations are not vertically integrated and are characterized by a relatively low fixed cost structure. Our production is primarily focused on engine and motorcycle assembly and the machining of two strategic components, engine blocks and cylinder heads. Our strategic goal with regards to production is to continually improve the integration of our in-house production operations with the assembly work performed by a network of select suppliers in an effort to reduce complexity in the production process and improve efficiency.
All Ducati motorcycles are manufactured at a single industrial facility located in Borgo Panigale, outside Bologna, Italy. The facility consists of 124,487 square meters of land and contains plants, warehouses and offices (approximately 36,000 square meters of indoor space), test tracks and parking areas. All manufacturing and assembly, as well as warehousing of certain components, are performed on site.
We outsource the production of the majority of our parts and components to third-party suppliers. As a result, the functions we perform at our facility in Borgo Panigale are basically those of assembly and quality control. As part of the production process each engine and each finished motorcycle is subjected to rigorous quality controls, including static and dynamic tests during the various stages of production.
31
We have implemented
several initiatives to improve our production processes and reduce costs.
In January 1999, we introduced a new software system to monitor the flow of all
production-related information, from the initial order to delivery of the
finished product. This system is an important and effective planning tool
that allows the user to automatically generate production schedules based on
sales forecasts, optimize warehouse stock volume levels, generate orders for
purchasing materials and organize the flow of materials needed for
production.
We are able to
maintain relatively high production efficiency, even with relatively low volumes
of production, primarily due to the fact that the various models produced have a
large number of common components, especially engine components. In 1999,
we embarked on a project to simplify production, aiming at improving quality and
reducing production costs. In 2000, we commenced another project called
Desmo (Ducati Evolution and Supply Management Optimization), aimed at
eliminating the inefficiencies in the production process. In 2005, we
produced 17 different models using only two engine blocks and three cylinder
heads. In order to simplify production and reduce costs, we have adopted a
“platform” approach to production, the purpose of which is to avoid
the assembly of numerous individual components. Under the platform
approach, a motorcycle is divided into a discrete number of key components (or
“platforms”) that are in turn made up of a number of
sub-components. One key supplier is made responsible for provision of a
platform and managing suppliers of the sub-components that go into the
platform. The platform assembly approach has reduced the number of our
suppliers and increased the volume of components provided by each supplier,
thereby improving our ability to negotiate competitive prices. It has also
provided an opportunity to develop jointly new components with key suppliers at
the research and development stage. We have already implemented platform
production processes for 83 assembly groups (including forks, clutch covers and
fuel pumps), thereby significantly reducing the number of parts required to be
assembled directly.
As part of our
initiative to outsource non-strategic activities to third parties, we outsource
our packaging, shipping and logistics functions to Saima Avandero S.p.A., which
allows us to respond more quickly to requests from our dealers. Saima
Avandero S.p.A. also manages the packaging and distribution of spare parts at
its dedicated center in Modena.
The present maximum
production capacity of our production facility is approximately 48,000
motorcycles a year, compared to a yearly average of approximately 35,000
motorcycles produced during the last three-year period. We do not foresee
having to bear costs for increasing our production capacity should demand come
back into line with the higher volumes of the past.
Supplies and Suppliers
We currently buy
from third-party suppliers the majority of the single motorcycle parts and
components that we use in our production process. In 2005, approximately
91% of our total costs of goods sold were for parts and components purchased
from third parties, while approximately 9% were for direct labor costs.
While we currently
purchase our parts and components from a large number of suppliers, our top ten
parts and components suppliers accounted for approximately 40% of our parts and
components procurements spending in 2005. Our largest suppliers include
Brembo (brake systems), Magneti Marelli (injection systems), Mahle (pistons),
Michelin and Pirelli (tires) and Showa and Ohlins (suspensions).
Except for a limited
number of mid-term supply contracts (generally for three years), we only enter
into short-term, renewable contracts with our suppliers. We typically
contract with our suppliers on a non-exclusive basis, which allows us to replace
suppliers at any time. Our policy is to identify at least two sources for
each component so as to be able to switch promptly to the alternative supplier
if necessary. Although for certain key components we rely upon single-source
suppliers, we believe these suppliers can also be replaced if
necessary.
32
Among the supply
contracts that play a major role in Ducati’s production activity are the
three-year contracts the Company has with Brembo and Magneti Marelli Power
Training for the supply of the braking system platforms and injection system
platforms of its motorcycles, respectively.
Intellectual Property
The design, main
technical features and the most important technology of Ducati motorcycles,
including the Desmodromic valve control system, are not protected by any
intellectual property rights. Only a few non-aesthetic technical features
of marginal importance of Ducati products are protected by patents. With
the exception of these limited technical characteristics, the Ducati motorcycle
components are manufactured according to known technologies and include
components not supplied to Ducati on an exclusive basis. See “Item 3.
Key Information—Risk Factors—Our motorcycle design and technology are
not protected by intellectual property rights.”
Our patents and
rights to use intellectual property had a total net value equivalent to
approximately €4.3 million as of December 31, 2005, and consist of software
licenses that Ducati North America and Ducati have purchased from third
parties.
Our expenses for
grants, licenses, trademarks and similar rights concern almost exclusively the
“Ducati” trademark, purchased at the time of our acquisition from
Ducati Motorcycles S.p.A. in 1996.
We own the
“Ducati” trademark and other trademarks associated with Ducati
motorcycles. The “Ducati” trademark is registered in all countries
that are signatory to the Madrid Agreement concerning the International
Registration of Marks and is registered as a European Community trademark in all
countries that are part of the European Union. This trademark has also
been registered in 44 additional countries on an ad hoc basis for motor
vehicles. In addition, we have registered the “Ducati” trademark
in other classes of products, including toys, apparel, eyewear and watches in
most of the countries in which the trademark for motors and vehicles is
registered.
On December 10,
2004, DMH sold the “Ducati Corse” trademark, one of the other
trademarks associated with Ducati products, to its subsidiary, Ducati Corse, for
the purchase price of €23 million, the value determined by independent
professionals, plus VAT. The transfer was made to allow Ducati Corse to
develop the “Ducati Corse” brand separately from the
“Ducati” brand, increasing its value by using it in the international
racing competitions in which it participates.
On December 11,
2004, DMH entered into a license agreement with Ducati Corse pursuant to which
Ducati Corse grants Ducati the right to use (i) the “Ducati Corse”
trademark for the manufacture and distribution of the “Replica Corse”
motorcycle models and (ii) the Ducati Corse racing activities images for
promotional and advertising purposes for a fee made up of a fixed part and a
variable component (royalty) calculated as a percentage of the price of the
“Replica Corse” products sold.
On November 11,
2005, DMH entered into a license agreement with Fiat Auto S.p.A. pursuant to
which DMH grants Fiat Auto S.p.A. the right to use the “Monster”
trademark to market a new version of its car “Panda” called the
“Panda Monster.” Fiat Auto S.p.A. may also register the
“Panda Monster” trademark for use in the automobile sector.
Governmental and Environmental Regulation
Like other
motorcycle manufacturers, we incur substantial costs in designing and testing
products to comply with domestic and foreign safety and emissions
requirements.
33
Motorcycles sold in
the United States, the European Union countries and other countries are subject
to environmental emissions regulations and safety standards with which we must
comply in order to sell products in these countries. Applicable
regulations in the United States include the emissions and noise standards of
the U.S. Environmental Protection Agency and the more stringent emissions
standards of the State of California Air Resources Board. Ducati
motorcycles sold in the United States are also subject to the National Traffic
and Motor Vehicle Safety Act and the rules promulgated thereunder by the
National Highway Traffic Safety Administration. Regulations applicable to
us in Italy include EU directives relating to emissions, pollution and noise, as
well as national rules on emissions, pollution, noise and safety issued by the
Ministry of Transport (
Ministero delle Infrastrutture e dei
Trasporti
). All of our motorcycle models are required to comply with
applicable homologation regulations in the countries in which they are
distributed. We are also subject to a number of Italian governmental
regulations relating to the use and storage of materials, discharge and disposal
of factory waste and safety standards of facilities and processes.
Insurance and Product Liability
We maintain
insurance against a number of risks. We insure against loss or damage to
our facilities, against loss or damage to our products while they are in transit
to customers, against certain potential environmental liabilities and against
product liability claims. While we do not cover 100% of these risks with
insurance, we believe that our present level of insurance is adequate in the
light of past experience. We expect that our present insurance levels will
be maintained on substantially the same terms and conditions in the
future.
We are engaged in a
business that exposes us to possible claims for personal injury from the use of
our products. We currently maintain liability insurance with a
per-occurrence limit of €20.0 million and an aggregate liability cap of
€20.0 million per year. See “Item 3. Key Information—Risk
Factors—We may be subject to significant product liability
claims.”
Description of Property
The following table
sets forth the principal properties in our use as of the date of this annual
report.
Location
Approximate
Square
Meters
Principal Use
Status
Bologna, Italy
(1)
124,487
Headquarters, production facility
See note
Cupertino, California, USA
1,161
Headquarters, Ducati North America
Leased
Paris, France
260
Headquarters, Ducati France
Leased
Cologne, Germany
408
Headquarters, Ducati Motor Deutschland
Leased
Tokyo, Japan
121
Headquarters, Ducati Japan
Leased
The Hague, Holland
400
Headquarters, Ducati North Europe
Leased
Marsta, Sweden
225
Offices and warehouse
Leased
Milton Keynes, England
450
Headquarters, Ducati U.K.
Leased
(1) On June 29, 2001, we entered into a sale and
leaseback transaction with Locafit S.p.A. with respect to a portion of our
production facility. See Note 5 to our audited consolidated financial
statements included in Item 18 for additional information on this
transaction.
In addition to the
above properties, we lease space in various other locations in the United States
and Western Europe on a regular basis for warehouse storage of motorcycles and
parts.
We believe that our
operating facilities are in good condition and are adequate, considered in light
of our capital expenditure plans, for the development, manufacture and marketing
of our current and anticipated products. For addition information on our
property and capital expenditures in our property, see
“—Production” and “—Capital
Expenditures.”
34
Capital Expenditures
Our capital
expenditures in property, plant and equipment were, €10.4 million in 2004
and €10.6 million in 2005. Capital expenditures in each of the years
were principally related to our development initiatives.
Investments in
intangible assets, which include our capitalized development expenditures for
these new models, amounted to € 15.1 million in 2004 and €20.5 million
in 2005. See “—Products and Distribution—Product Research
and Development.”
Our capital
expenditures currently in progress relate principally to our continuing
development initiatives related to new motorcycles and the Desmosedici, which we
developed and began using in 2003 to compete in the MotoGP Championship.
We believe that competing in the MotoGP Championship will further enhance
recognition of the Ducati brands for innovative design, advanced engineering and
racing success and spur further innovation in the design and engineering of our
motorcycles that will ultimately improve the quality and performance of our road
models. We spent €7.4 million during 2004 in connection with this
project (of which €3.3 million were capitalized and are included in the
total investments in intangible assets in 2004 described above), and €8.6
million (entirely capitalized) in 2005. The expected cost for 2006 is
€7.5 million.
Next Section
Previous Section