Earnings Call: H2 2022

Jan 31, 2023

Ladies and gentlemen, welcome to the presentation of our preliminary results of 2022. Maybe let's start on the headline. Another record year in 2022. If we are moving to page 8, then I can show you the structure in the current status. Bajaj Mobility, in total, by the end of 2022, we employ more than 6,000 people. You can see the structure, the current one. It's the main division. The backbone is the motorcycle division with 4,600 employees. Then in the middle, our new mobility or the bicycle division, where we stepped in 3 years ago, strategic-wise, with 250 employees. Then on the right side, you can see one of the key success factors of our group. It's R&D design and pre-development, where we employ more than 1,200 people. That means almost 20% of our workforce is focusing on developing products and innovation. I think that's the key success factor. If we move to page 10. You can see how it develops on sales, on revenues. Almost 20%, +19% to a total amount of EUR 2.437 billion, which is outstanding, and we are very proud because after a tough first half year, which was heavily influenced by bottlenecks on the supply chain, mainly semiconductors. I won't name the tier 1 name, which has affected that. We were able to catch up in the second half of the year, especially in the off-road season, so that we could achieve that huge amount of sales. There's a headline on page 10, 30 years of successful track record. I think even for me, it's always nice to see on that after we celebrated. We didn't have time to celebrate, but already 30 years, I think really successful way. Then let's move to page 11, regarding the units. In total, we have achieved almost 450,000, but we have to separate it. On the motorcycle side, we were able to increase the number of units by 13% to 375,000 units. In the bicycle division, where were more than 118,000 e-bicycles and bicycles, we could increase by 15%. But honestly saying, based on also huge supply issues on that side, on the bicycle supply chain, we had a bigger increase in mind. Anyway, we achieved a plus of 15%. If we move to page 12, it's a breakdown of the different regions in the world. I think in the first half year, we were heavily affected by supply chain issues, especially semiconductors. We weren't able to produce more than 15,000 street motorcycles, which are mainly heading towards Europe. So that you can see in Europe, we were not able to increase the number. It's more or less stable. It's a minus of 2%. The opposite you can see in North America, where we could utilize the off-road season and also the decision that we increased the production number in the second half. So we had a plus of 53%, which is also cost of availability, because the second half year in 2021, it was a little bit a problem for availability. So that is a huge success. India is still facing problems out of COVID. So the market last year did still a minus 13%-15%. Very positive development in South America, especially Colombia, where we could increase numbers by 13%. Asia, also very stable, +5%, although China was more or less closed due to COVID. Australia was the market a minus of 14% related to us. That is a breakdown. If you can see on the right side, the breakdown of the different brands. KTM, it's a plus of 4%, mainly the small increase caused by the bottleneck in the first half year. Very positive, Husqvarna. Now it's already more than 70,000 units. I remember 10 years ago when we have taken over Husqvarna, we had a number of 10,000. Our youngest kid in the family, GasGas, is doing a plus of 30%, is nicely running in the slipstream of the KTM platform, is doing a very good job. If we move to page 13, then you have the breakdown between the three main regions. Europe is the core region where we did 96,000 units, which is less than what we had in the plan because supply chain issues. We started already the first approach in North America, so 12,000 we could sell in North America and the rest of the world. On the bicycle side, you can see 75%. On the non-e, it's around EUR 43,000. That's mainly caused by the takeover of Felt in the U.S., which has helped us in that sense. If we move to page 14, a breakdown in the, I would say, the main business growth driver is the dealer network. Meanwhile, we have more than 4,000 motorcycle dealers globally. I would say 40% of them already focus on our three brands, what we call a flagship store or premium dealers. The rest are two-wheel brand or multi-brand dealers. In the last two years, we were able to also implement 1,700 bicycle dealers. A small portion of that, more than 300, are coming out of the existing motorcycle dealer network because an e-bike is a power two-wheeler. It's the same approach like a motorcycle. You have a powertrain, you have a battery, you have a warranty commitment. So the motorcycle dealer is perfectly fitting to such a product. If we move to page 18, I think it's one of the most success factors in our group, it's the strategic alliances, which we have meanwhile in all important areas. The most important is India. I just visited last week, India, for a day because I had the honor to present the one millionth production KTM in the factory in Pune. Since 2011, we have built more than one million KTMs and Husqvarnas based on our engine platform. So that strategic partnership has leveraged us in a very good global way. If we move to page 19, I think it's the second key success factor. We have also achieved a joint venture with one of the three leading Chinese motorcycle manufacturers, CFMOTO. We have set up a joint venture. On the picture, you can see the newly constructed factory where we are doing the middle-class engine platform from 650 up to 790cc. That engine platform is also used by CFMOTO for own models. In that strategic alliance, we agreed that we take over distribution CF products for Europe, which helps us to have entry bikes on a price tag for middle class. Secondly, we are producing our entry middle class in the future for the global distribution. Already, last year, we did a total quantity of around 19,000 in that new factory. The capacity is around 50,000, but it's quite easy to increase it. That strategic alliance with China helps us also to be present in China and to have a price-wise competitive manufacturing base for the entry middle class. Then let's move to page 20. It's, I would say, the latest or the newest joint venture with Maxcom in Plovdiv in Bulgaria, which is becoming, I would say, the new center of e-bike manufacturing in Europe, because we think it's very important to reshore and to bring back component manufacturing and assembling to Europe. Because the main market is Europe, not Vietnam or these kind of things, and to reduce the working capital duration. That's a very important thing. Secondly, to have more control regarding the development of the different components. In addition to the assembling capacity in Plovdiv, which is meanwhile 500,000 units, we also agreed to set up or to build a frame manufacturing in Europe because the frame is the most important first component you need for assembling bikes. On page 21, that's in our, by far, biggest market. The clear statement for the next decade. That's the biggest single investment we ever did. It's the new headquarter in Murrieta, California, where we, in a month's time, the official opening on 10 hectare land. We have established our headquarter for the North American market, U.S. and Canada, where we are handling all brands what we have. Meanwhile, we have more than 350 employees, and we did last year almost $1 billion sales in the U.S. So it's the most important market for that. If we move to page 22, that's the global footprint for the current production facilities. In Austria, we are focusing on off-road and premium bikes, where we did last year 220,000 units. On our joint venture in India, in Pune, Bajaj produced 150,000 KTMs and Husqvarnas. In China, as I already said, 19,000. Then we have a special production for trial bikes in Spain after the takeover of GasGas in Spain, in that in Girona. We did around 1,000 special trial bikes. Then, as a new hub in Bulgaria, Plovdiv, the big e-bike city manufacturing base. Then we have globally four important CKD operations where we have to avoid import taxes. The biggest one is on the Philippines, where we cover basically ASEAN area, Malaysia, Cambodia, Vietnam, and Thailand. Then we have Argentina. It's just for Argentina, which is by far the biggest country currently, and in Brazil, in Manaus. As well for Argentina, we have also a CKD operation with our importer in cooperation. So basically that's the global footprint, which is, in any sense, ready to increase. Indian production, Bajaj, in two months' time, is opening a total state-of-the-art new production facility for premium bikes, for the KTM, Husqvarna, and the future products, with a total volume of half a million. Indian, China production is also ready to increase, and in Austria for sure is also without any big investment. We can go up to 250 if it's needed. That's the big picture regarding production facility. And then finally, before I hand over to Fritz Reuter, my colleague on the CFO, on page 26 is the latest, I would say, first step in the acquisition of MV Agusta, the luxury and premium street motorcycle brand down in Italy. It took more than three years to build up the trust, to negotiate, and to have the patience to make the first step. The first step is a very, I would say, clear structure, where we are focusing on each strength. First of all, we take care of the future for the supply chain. That means we have set up a new company which is buying all the components for MV Agusta products, and then handing over to the operational MV Agusta company. MV Agusta is assembling that bike and is handing over that with an agreed margin to our distribution. We take care 100% for the worldwide distribution. As a first statement, we agreed to step in with a qualified minority with 25.1%, which is a value of around EUR 50 million. Within the next two years, we will look how to get closer. So basically that's on MV Agusta, and then I would like to hand over to Fritz Reuter, my colleague on the- Okay, Stefan, thank you very much. Also, good morning from my side. I will proceed with page 38. Here you can see another important success factor. This is our technology approach, product development approach. We are following an open technology approach. As you can see here, for us, besides the combustion engine, in which we believe also in future, the e-drive, that means electric engines, electric powertrains, will be the two approaches for the future. Combustion engine, we think that this concept will not be deleted in future, because we believe in e-fuels. E-fuels is a CO2 neutral possibility to run that engines, and for us in the two-wheeler segment, especially in the bigger CC area, we believe that this will be the right approach. On page 39, you see our development centers. 29, sorry. 29, sorry. On page 29, you see our development centers. Some pictures, the main hub is Mattighofen with 750, where we are doing the vehicle development. In Salzburg, with Kiska and the e-mobility research, we are working with 400 people. The main focus is here design and electric powertrain. Spain should be mentioned. Spain is a typical example. We go where the competence is, and in Spain, there is a certain capacity of very good engineers we are using for development processes. On the next slide, you find our development of employees. The biggest challenge is for sure to get the right people. You have seen we are working at the moment actually with more than 6,000 people. We increased our staff by more than 800 employees. This is a big challenge. This is only possible with apprenticeship training. We are approaching very strict, and we also try to increase our female share. At the moment, one-fourth of our employees is female. We believe that here is an additional potential to manage the big challenge in the employee sector. On page 33, I would put the focus on our ESG activities. We are very happy that recently we received the Sustainalytics rating. We are happy that in this rating, we are in the top end of the motorcycling in the motorcycling segment, as well as in the automotive segment. This is an area we are investing a lot of money and a lot of time since a couple of years, which is, for us, an important sector. I think our product range and product development, we are fitting perfectly into this segment and needs. At the end, on page 35, I would like to keep your focus on our financial report for the last year. The revenue with more than EUR 2.4 billion was an outstanding one, a plus of more than 19%. EBITDA with figure close to EUR 400 million. That means cash flow potential to realize the long-term strategic goal of a sustainable growth business case. EBIT, in the minimum, more than EUR 200 million, 235, a plus of more than 10% in comparison with last year. We have been on the upper side of the range where we published with 9.7% EBIT margin and earnings after minorities. This is a preliminary figure because the tax calculation at the moment are preliminary. With a little bit more than 170 million, nearly no more minorities. That means, earnings after minorities are all for the main shareholders and no minorities as we have seen in the past. The 6,000 employees already mentioned. Let's proceed on page 36. You see the two segments. The motorcycle segment ran very well last year with an EBIT margin of 10.7% and a revenue of more than EUR 2.2 billion. Basically, we are below budget figures, so we expected much more revenue for last year because, we have not seen that supply chain struggles, which raise up. These supply chain problems led, at the end of the day, to, I would say, a very, very low and below the expectations lying growth rate. At the end of the day, so we have reached a positive result, 1.4% EBIT margin is not the goal. At the end of the day, we believe in a sustainable and the midterm goal, an EBIT margin, which is very similar to the EBIT margin we can realize in the motorcycle segment. On page 37, you see some balance sheet key figures. The balance sheet total increased by more than 25%. The reason besides the growth is an increase of working capital employed, not only in a debt, but also in a prudent approach. The inventory increased up to EUR 600 million. The reason, therefore, was the supply chain challenges we had during the last year. To reduce the working capital, is one of the, I would say, main topics, in 2023, where we have set up programs to reduce that to an ordinary level. The equity, with more than EUR 900 million, is equity ratio of around about 36%. This equity ratio is a little bit suffering by the balance sheet total, which is, I would say, with EUR 2.5 billion, around about EUR 200 million too high. If you normalize the balance sheet total, we are very close to 40%, what is the strategic goal. The financial key figures, is it gearing? Is it net debt/EBITDA? I think we're on track with a 28% gearing. That means a healthy balance sheet structure and capital structure. On the free cash flow side, we realized, I would say, a zero number. You have to be aware that in the last three years, on an average base, we realized 5.6% cash flow, free cash flow. This is above the expectation and the guidance we always mention, which is lying between 3% and 5%. That means, the free cash flow development will always be interpreted on a midterm range average base. We are happy that with that midterm average, we are fully well on track. On page 38, you see the development of net debt. What is the main point Besides the free cash flows dividend of EUR 34 million, it's the current leasing, which is not included in the free cash flow, and the acquisition of some KTM AG minorities. In the meanwhile, we hold 100% in KTM AG, so that's a figure of a little bit more than EUR 250 million net. That I think in comparison with the turnover figures of more than EUR 2.5 billion. I think it's a very healthy and fine number. We are happy with that. Coming to the last slide in our presentation, the financial guidance for 2023. We published revenues growth again. In 2023, we expect the growth rate between 6% and 10%, with an EBIT margin between 8% and 10%, which is in line with the long-term goal, which is the same range. This was my report. Thank you very much, and we should start now with the Q&A segment. The first question comes from Constantin Hesse from Jefferies. Please go ahead. Hi there. Good morning, everyone. Thank you very much for taking my questions. First of all, congrats on the strong set of results. Actually, I have a few questions, but the two first questions that I have are more related to the 2023 as well as medium-term targets. For 2023, pretty impressive growth target there from 6%-10%. If you could maybe discuss this a little bit, where inventory levels are at the moment, and are you seeing pretty good end consumer demand as well, or is that mainly sell-in data or basically sell-in expectations? Let's start with that one. Yeah. Throughout the last 30 years, we have delivered that range between 6% and 10%, very often much more. Why we are confident in 2023. First of all, availability is there everywhere. On the there's no region anymore which is maybe lacking some content. That's one thing. Secondly, we expect now an increase on markets because a half year ago, we were talking about every region has to see a recession. That came down. Meanwhile, it's stagnating maybe. That's the surrounding where we are used to gain market shares. It's proven that if the market is getting tough, then the better ones are winning. What's helping us this year, we have a lot of new models which get launched this year, and that helps us also to achieve that and to push that. Region-wise, I would say, India is doing this year better than expected. They are coming back. That's what I've seen. Latin America is still strong. Also, we expect a better thing on Australia. U.S., we see flat. In Europe, we see the market a little bit going down between 3% and 5%. That's my expectation. That's the surrounding we are used to, so nothing new. Now the better ones are winning. If everything is growing, you have more or less the same growth rate. We like that. Understood. But just on- Yeah. Just maybe just on the market share very quickly, Mr. Pierer, you mentioned growth. Market share has now been declining over the last two years in Europe and the U.S. Do you see that- But I don't mean that in a negative sense. I'm just saying, are you seeing this rather as a normalization of the market shares after having gained so much market share over the last few years? Or is there a particular reason that is different than that, why you're seeing market shares declines both in Europe and the U.S.? On Europe, it's clear the market again, because, and now I name it, Bosch has stopped us to produce 15,000 street motors for the first half year. That's the reason that we lost market shares. It's clear. Availability and not able. So in Europe, for sure, we will gain market shares back again. Bouncing back. In U.S., we have achieved already a huge market share. To keep that, I think it's also a certain challenge, I can tell you. We are by far the biggest European one. We have taken over slightly last year, Yamaha. Hey, we are really a big guy there. Although on the street, we are not that strong so far. So there's also a possibility to grow and gain market shares on street. On off-road, we are anyway the biggest one. We are the dominating brand. Okay. Fair enough. Then just on the medium-term target in the electrical segment, in the electric segment, how comfortable are you still with this 2025 target of reaching the EUR 500 million given the- That revenue is- It was an availability issue, but you still comfortable with the EUR 500 million for e-bikes in 2025? How should we- Absolutely. Yeah. How should we think about the e-motorcycle segment here? Let's start on the real core market segment is the e-bike, which is basically it's a hybrid. It's the pedal and an electric powertrain. That has become a huge market. Supply chain is now sorted out because all, due to the huge demand throughout Corona, all component manufacturers have increased quantities. So availability is there. Now we expect that consolidation is starting. Because the e-bike market will decline I would say at least 10%-15% compared to the COVID times. Then you will see on the dealer network consolidation, you will see it also on OEMs. In that, we are confident because we have set up a European production hub with our partner in Plovdiv. So we have a huge competence on components. We have a worldwide motorcycle dealer network where we can use maybe finally 10%, 20% of the number. So we have a lot of tools in the hand which others don't have, although we are much bigger. In that, I'm very confident. The driver here is really. Mm-hmm. Yep. No, I was just going to say, the driver here is really market share gains then. Market share gains. Because last year we couldn't get the quantity what we had planned. Now, in that we are newcomer, we gain market share. On the motorcycle or on the electromobility, that's clear our experience will cover up to 125cc. It's the A1 class. In that you can do 48-volt low voltage concept, which is quite easy in production, delivery, and inventory on dealer level. Secondly, the mileage for those products are achievable. You have a small battery where you can achieve a margin as a manufacturer. That is clear. As soon you are going up to big displacements, I think that's a simple explanation why it doesn't work with electromobility. 1 liter petrol is a weight of 0.8 kilo. If you want to get the same technology on lithium-ion battery package, you have to do 10 times the weight and volume. If you have an off-road bike with 10 liter gasoline, you need 100 kilos. Where should you put in that? We are squeezed by space as a motorcycle. That's never ever it will become a big portion above 125. Below, it's clear. Urban mobility, scooters, all these things becoming electric. So in that high-end motorcycle industry, it's heading towards synthetic fuel. It's very simple and easy to explain. Because on electrification, so many, everybody's talking and talking so much shit, sorry to say it. That's- Understood. Energy density. That's the reason that we are focused on products with a small battery. We are one of the leading brands for kids bikes, for motocross sports bikes for kids. There'll be a balance bikes, a very little battery, a very nice premium price tag. Yeah, it's selling very well, and you get the same margin as you're used with combustion engines. That's our advantage because we were the pioneer on electromobility. We launched 2013. At that time, everybody was laughing about Elon Musk. The first off-road electric bike. We learned it. It was a high voltage concept. We learned what is working, what is not working. That advantage now we are utilizing. Yeah. That makes sense. Understood. Just quickly on bicycle margins very quickly. Last time we spoke, which was, I think almost a year ago, you were expecting margins to actually improve to e-bikes. Moving towards rather 5%, 6% in 2022. Sorry, rather 4% in 2022, but then seeing potentially going towards 6% or 8% in 2023. Clearly margins have been under pressure this year, probably because of supply chain. Could we actually see a solid improvement into 2023 on the bicycle margins? Yes, because it is, one, it's a matter of volume, if you are increasing the volume. Secondly, supply chain is sorted out, so that huge logistic costs and all that has got much better. But I think it's between 5% and 6%. That's the target. But on the final end, if we have a strong European manufacturer base, component base, we must catch up that gap to the motorcycle. That's clear. This is our key expectation. Yep For the, I would say midterm, long-term run. Yeah. Okay, that's understood. Friedrich, maybe over to you, a very quick one. A couple of questions on free cash flow. Working capital obviously impacted negatively this year. Could we see free cash flow going back to something around 3%-5%, potentially in 2023 already? Second question is on CapEx. Significant acceleration there. I think we discussed this also that you expect CapEx to continue being quite higher relative to 2021 to end 2020 levels. Could you maybe discuss a little bit here where the investments are going and what the focus is to achieve? Thanks. Free cash flow, for sure. The midterm sustainable goal will stay between 3% and 5%. We expect the positive free cash flow also again in 2023. I repeat to mention the average of the last three years with 5.6% was above that ratio and expectation. The CapEx program on the, I would say on an average base, sustainable wise, will stay, including leasing, around about 10%. This year, we have two major increases. One is the investment in U.S. into our new, set up. We invested around about EUR 45 million and the investment in MV Agusta, which was not at that level. But, again, it was, I would say, not a sustainable investment case. For the product development, we had a number of EUR 160 million last year. This is around about 7%. This we see on that level and in a sustainable way. Because this is, I think the key driver and key success factor for our growth case on the one hand, and the profitability, for the future. Understood. All right, great. Thank you. The next question comes from Christian Arnold from Stifel Schweiz. Please go ahead. Yes. Good morning, gentlemen. Just a follow-up on the last bit you just discussed, the R&D. You expect the R&D to stay on a 7% level. That means this EUR 161 million will go towards EUR 175 million in 2023. Is that the way we should think about? Relatively. We are talking about close to 7%. We believe that we will stick to it. Because product development, the technology challenges, will be the driver and this is the base for the future positive results and the growth potential. Okay. With this CapEx ratio, we are able to, on one hand, finance our growth case on our own, and B, we expect the remaining free cash flow of 3%-5% for dividend payments. Good. Could you remind us about your average price increase in 2022, and what are you expecting for 2023? What is baked in your growth guidance of 6%-10% for 2023 in terms of price increase? An average between 3% and 5%, that is the price increase related to different product groups. That is on average. Let us say on average 4%. That is valid for 2022 as well as for 2023? Yes. Okay. Because energy costs are not for us. Because we are an R&D company, so, basically energy costs are not that. On labor, salaries and wages for sure increased, but that you can partly cover with efficiency. Also in comparison with the other competitors, that was the increase what happened globally. Between 3% and 5%, even the Japanese. Okay. Then again, coming back on the inventory situation, on the retailer network. Could you remind us how the inventory levels we have seen at the retailer networks. They were there at the beginning of 2022, I believe, or in the first half probably rather low, and now they are kind of filled up to an average level, above average level. Where do we stand here? How did that develop during 2022? Yeah. Maybe let's repeat your last question. Every new model you are launching anywhere, you have the freedom, flexibility to set up a new price tag. Yeah. It doesn't matter whether you can increase by 10 or something. That's the advantage what we have. Every three years or two years, we are launching new models, then you can adopt the price for that. That's the high flexibility. Yeah. For existing running models, we have an average of 4%. That's one thing. Secondly, inventory. I would say it's meanwhile, we have achieved normality. Yeah. Which was before Corona. For sure, normality means also competition starts. Again, that means a certain support maybe for elder models, if you have such in your channel. You have to support the dealer for the retail promotion. That's the thing. In 2022 or in 2021, due to missing availability, supply chain, this or that, you didn't have a need to support on the promotion because the demand was there. But the promotion, what you could save, we had to use for high logistics costs, supply chain issues, this or that. Now it's turning around. Normality of the supply chain, efficient production, and you have that freedom or that amount of money to support in case of. That's the thing. Finally, in total, it's the same guidance what we're always saying. Thank you very much. We have a follow-up question from Mr. Constantin Hesse from Jefferies. Please go ahead. Mr. Hesse, your line is open. Whoops, sorry, I was muted. Just one last question. Just if you could comment a little bit on the new models that you expect to launch this year. Anything in electric or anything e-fuels wise, any of the other models? Just a bit of color. Thanks. Now it says some models on the kids bike level. So comparison 65 motocross electric model, 50cc, then a small one. Mainly products for kids and youngsters, where you have a margin. For sure, in 2024, we are launching the latest version of the off-road Freeride, which is, I would say, a product for adults. So that is, we are focusing on products where we can get a margin. The rest is on the premium end, 950cc, premium middle class. We are launching a new adventure type bike here. We are also heading towards that kind of super bike. As much as we can to gain market share in that premium mid class and then in the top class, so where the real margins are. Regarding e-fuels, our developments, what does it mean? More or less, the message is, most of our engines are fit for e-fuels. That means they can be also used with that new fuel technology we expect for the future. In racing, we are already starting with that project. In 2024, MotoGP is heading towards e-fuel. That means in 2024, we are using 40% e-fuel already, and from 2027 onwards, 100% e-fuel, just for racing purposes. Also for the market, we expecting at the beginning, not 100% clean e-fuel concept, but a blending concept. That means you can use e-fuels to blend them with the already existing fuels and increase the level of e-fuels in future. This is our expectation. Sorry. That was a bit fast to me. MotoGP was 40% e-fuel, and where was it 100%? '24. Great. Thank you very much. From then 2027 onwards, 100%. It's step by step because the mixture of 40%, we have proven it on test benches, on racing. No different. You can use it immediately without any technical changes. Great. Thank you. Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to the management for any closing remarks. Okay, thank you very much for the open discussion. We have presented and we see the outlook realistically, but positive. Thank you very much. Thank you.