Bajaj Mobility AG (BMAG) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the presentation of our preliminary results of '22. Maybe let's start on the headline, another record year in '22. If we are moving to Page 8, and I can show you the structure in the current status. PIERER Mobility in total by the end of '22, 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. And then on the right side, you can see one of the key success factors of our group. It's R&D design and predevelopment 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 factors. So if we move to Page 10, you can see how it developed on sales and revenues. Almost 20%, plus 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. And 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 the 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. And in the bicycle division, where we're 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. But anyway, we achieved a plus of 15%. If we move to Page 12 is 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 motorcycle, 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 cause of availability because the second half year in '21. And '21, it was a little bit a problem for availability. So that is a huge success. India is still facing problems out of corona. So the market is -- last year did still a minus of mean of 13% -- of 15%, very positive development in South America, especially Colombia, where we could increase numbers by 13%, Asia also very stable, plus 5%, although China was more or less closed due to corona. Australia was the market - a minus of 14% related to us. So that is a breakdown. And 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 for 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. And then our youngest kid in the family, GasGas is doing plus of 30%, is nicely running in the system of the KTM platform, is doing a very good job. If we move to Page 13, then you have the breakdown between the 3 main regions. Europe is the core region where we did 96,000 units, which is much less than what we had in the plan because of 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 43,000. That's mainly caused by the takeover of FELT in 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 focused on our 3 brands, what we call as flagship store or premium dealers. The rest are dual brand or multi-brand dealers. And in the last 2 years, we were able to also implement 1,700 bicycle dealers. And a small portion of that, more than 300 are coming out of the existing motorcycle dealer network because an e-bike is about 2-wheeler. It's the same approach like 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 is 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 1 million production KTM in the factory in Pune. Since 2011, we have built more than 1 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 also have achieved the joint venture with one of the 3 leading Chinese motor 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 790 cc. And that engine platform is also used by CFMOTO for own models, and then that strategic alliance, we agreed that we take over distribution sales products for Europe, which helps us to have entry bike on a price deck for middle class. Secondly, we are producing our entry middle class in the future for the global distribution. Already last year, we did around -- 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. So that strategic alliance with China helps us also to be present in China and to have a price as competitive manufacturing base for the entry of middle class. And then let's move to Page 20 It's the, 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 reassure and the bring back component manufacturing and assembling to Europe. Because the main market is Europe, not Vietnam or all these kind of things, and to reduce the working capital duration. That's a very important thing. And secondly, to have more control regarding the development of the different components. In addition to the assembling capacity in Plovdiv, which is mean by 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 components you need for assembling bikes. So -- and on Page 21, that's by far the 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 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. And 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 us. And 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. And then we have a small 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-bicycle manufacturing base. And then we have globally, 4 important CKD operations where we have to avoid import taxes. The biggest one is in the Philippines, where we cover basically Asian 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. And as well for Argentina, we have also a CKD operation with our import incorporation. So basically, that's the global footprint, which is, in any sense, ready to increase Indian production. Bajaj, in 2 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 0.5 million. Indian -- China production is also ready to increase. And in Austria, for sure, it's also without any big investment, we can go up to 250,000 if it's needed. So that's the big picture regarding production facility. And then finally, before I hand over to Rich Roithner, my colleague or 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 3 years to build up the trust, to negotiate and then to have the patience to make the first step. And 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 agreed margin to our distribution. We take care 100% for the worldwide distribution. And as a first statement, we agreed to step in with a qualified minority with 25.1%, which is a value of around EUR 15 million. And within in the next 2 years, we will look how to get closer. So basically, that's on MV Agusta, and then I would like to hand over to Rich Roithner, my colleague.

Okay. Stefan, thank you very much. Also good morning from my side. I will proceed with Page 28. 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 the future, the e-drive. That means electric, in a sense, electric powertrains will be the 2 approaches for the future. Combustion engine, we think that this concept will not be deleted in the future because we believe in e-fuels. E-fuels is an CO2-neutral possibility to run that engine and for us in the [ 2 ] segment, especially in the bigger cc area. We believe that this will be the right approach. 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 in the e-mobility research. We are working with 400 people. The main focus is here design and electric powertrain, but also 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 developmental processes. On the next slide, you'll find our development of employees, so the biggest challenge is, for sure, to get the right people. You have seen we are working in the -- actually with more than 6,000 people. We increased the staff by more than 800 employees. This is a big challenge. This is only possible with apprenticeship training. We are approaching very, very strict. And we also try to increase our female share. At the moment, 1/4 of our employees is female. We believe that there is an additional potential to manage the big challenge in the employee sector. On Page 33, I would focus on our ESG activities. We are very happy that recently we received certain analytics rating. We are happy that in this rating, we are in the top end of the motorcycle -- in the motorcycle 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. And I think we -- our product range and product development, we are fitting perfectly into this segment and needs. So at the end, on Page 35, I would like to keep your focus on our financial report for the last year. So the revenue with more than EUR 2.4 billion was an outstanding one, plus of more than 19%. EBITDA, we've closed -- a figure close to EUR 400 million. That means cash flow potential to realize the long-term strategic goal of a sustainable growth business case. And EBIT in the mean of more than EUR 200 million, EUR 235 million, a plus of more than 20% in comparison with last year. We have been on the upper side of the range 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 EUR 170 million, nearly no minorities. That means earnings of the minorities all for the main shareholders and minorities as we have seen in the past. The 6,000 employees already mentioned. Let's proceed on Page 36. You see the 2 segments. The motorcycle segment ran very well last year with an EBIT margin of 10.7% and then revenue of more than EUR 2.2 billion. The bicycles,we are below -- clear below budget figures. So we expected much more revenue for last year because we have not seen that supply chain struggles which raised up. But these supply chain problems led at the end of the day to a, I would say, a very, very lower and beyond below the expectations line growth rate. But 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 sustainable and the midterm goal in 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 the debt but also in a [ prudent ] approach. So the inventory increased up to EUR 600 million. The reason, therefore, was the supply chain challenges we had during the last year. And to reduce the working capital is one of the, I would say, main topics in '23, 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, round about EUR 200 million too high. So if you normalize the balance sheet total, we are very close to 40% what is the strategic goal. So the financial key figures, is it gearing? Is it net debt to EBITDA? I think we're on track with 28% gearing that needs a healthy balance sheet structure and capital structure on the free cash flow side. So we realized, I would say, a 0 number, so -- but you have to be aware that in the last 3 years on an average base, we realized 5.6% cash flow -- free cash flow. This is above the expectation and the guidance we always mentioned, which is like between 3% and 5%. That means the free cash flow development will always be interpreted on a midterm range, average pace. And so we are happy that with that midterm average, we are fully well on track. On Page 38, you see the development of net debt. So what is the main point besides the free cash flow 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 it led to a figure of a little bit more than EUR 250 million net debt. I think in comparison with the turnover figures of more than EUR 2.5 billion. I think it's a very healthy and a prime number. We are happy with that. So coming to the last slide in the -- our presentation, the financial guidance for '23. We published revenues once again, in '23. We expect a growth rate between 6% and 10% within an EBIT margin between 8% and 10%, which is in line with the long-term goal, which is the same range. So this was my report. Thank you very much, and we should start now with the Q&A section.

The first question comes from Constantin Hesse from Jefferies.

First of all, congrats on the strong set of results. A couple of -- actually, I have a few questions, but a couple of -- the 2 first questions that I have are more related to the '23 as well as medium-term targets. So for '23, I mean, pretty impressive growth target efforts from 6% to 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.

Yes. It's about the last 30 years, we have delivered that range between 6% and 10%, very often much more. Why we are confident in '23? First of all, availability is there everywhere. So there's no region anymore which is maybe lacking some COVID. So that's one thing. Secondly, we expect not an increase on markets because half a year ago, we were talking about every region has to see a recession. That came down. Meanwhile we are stagnating maybe. But that's the surrounding where we are used to gain market share. So it's proven that if the market is getting tough, then the better ones are winning. And what's helping us this year, we have a lot of new models, which gets launched this year. And that helps us also to achieve that and to push that. Regional-wise, I would say India is doing this year better than expected. They are coming back. So 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. So that's the surrounding where we used to. So nothing new, and now the better ones are winning. If everything is growing, you have more or less the same growth rate. So that's -- we like that.

Understood. Maybe just on the market share, Mr. Pierer. And then you mentioned growth i mean market share has now been declining over the last 2 years in Europe and the U.S. Do you see that -- but I mean not -- 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 it's different than that, why you're seeing market shares declines both in Europe and the U.S.?

On Europe, it's clear that the market declined because, now I name it, Bosch has stopped us to produce 15,000 Street motorcycles first half year. That's the reason that we lost market share. It's clear availability and not able. So in Europe, for sure, we will gain market shares back again. Bouncing back. And in U.S., we have achieved already a huge market share. And the key set, I think it's also a certain challenge. I can tell you we are by far the biggest European one. We have taken almost slightly last year Yamaha. 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. And 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 that revenue is -- I mean, it was an availability issue, but are you still comfortable with the EUR 500 million for e-bikes in '25? And 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 the hybrid. It's the [ pedal ] and the engines -- and electric powertrain that has become a huge market. And 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. And now we expect that consolidation is starting because the e-bike market will decline, I would say, at least 10%, 15% compared to the corona times. So -- and then you will see on the dealer network consolidation, you will see it also on OEMs. And so in that, we are confident because we have set up a European production 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 hands which others don't have, although we are much bigger. So in that, I'm very confident.

I was just going to say the driver here is really market share gains then.

Our market share gains. Because last year, we couldn't get the quantity what we have planned. So now in that, we are a newcomer. We gained market share. On the motorcycle -- or on the electromobility, that's clear. Our experience will cover up to 125 cc. it's the A1 class. In that, you can do 48-volt low-voltage concept, which is quite easy in production, delivery and the inventory on dealer level. Secondly, the mileage for those products. We will see -- you have a small battery where you can achieve a margin as a manufacturer. So that's it's clear. As soon you are going up to big displacements, I think that's a simple explanation why it doesn't work with electromobility. One liter battery is a weight of 0.8 kilo. If you want to get the same technology on lithium ion battery package, you have to do 10x the weight in volume. So if you have an off-road bike with 10 liter gasoline, you need 100 kilos there, where should you put in that. We are squeezed by space as a motorcycle. And that's -- never ever it will become a big portion above 125. Below, it's clear, urban mobility, scooters, all the things becoming electric. So in that high-end motorcycle industry is heading to a synthetic fuel. It's very simple. It's easy to explain. Because on electric, so many -- everybody is talking and talking so much s**t, sorry to say it. Yes, that's energy density. And 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 motor sports, sports bikes for kids, balance bikes, very little battery, a very nice premium price deck. And yes, it's selling very well, and you get the same margin as you are used with combustion engines. That's our advantage because we were the pioneer in electromobility. We launched 2013. At that time, everybody was laughing about [ Elmas ], the first off-road electric bike. And we learned this. It was a high-voltage concept. We learned what is working, what is not working. And that advantage now we are utilizing, yes.

That makes sense. Understood. And then just quickly on bicycle margins very quickly. I mean, last time we spoke, which was I mean, I think, almost a year ago, you were expecting margins have actually improved in e-bikes. So moving towards rather 5%, 6% in '22. I'm sorry, in -- sorry, rather 4% in '22 but then seeing potentially going towards 6% or 8% in 2023. So clearly, margins have been under pressure this year probably because of supply chain. So could we actually see a solid improvement into 2023 on the bicycle margins?

Yes. Because one, it's a matter of volume, if we are increasing the volume. Secondly, supply chain is sorted out. So that huge logistic costs and all it has got much better. But I think it's between 5% and 6%. That's the target. But if we are -- on the final end, if we have a strong European manufacturer base, component base, we might catch up that gap to the motorcycling. Yes, that's clear.

This is our key expectation for the, I would say, midterm, long-term run.

Yes. Okay. That's understood. And then Rich, maybe over to you a very quick one. A couple of questions on free cash flow. I mean working capital obviously impacted negatively this year. Could we see free cash flow going back to something around 3%, 5% potentially in '23 already? And second question is on CapEx. Significant acceleration there. You also -- I think we discussed this also that you expect CapEx to continue being quite higher relative to '21 and to 2020 levels. Could you maybe discuss a little bit here where the investments are going and what the focus is to achieve?

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 '23. I repeat to mention the average of the last 3 years with 5.6% was above this 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. So we have 2 major increases. The one is the investment in U.S. into our new setup. We are -- we invested around about EUR 45 million. And the investment in MV Agusta, which was not at that level. But again, it was an -- I would say, not a sustainable investment pace. For the development -- product development, we had a number of EUR 160 million last year. This is around about 7%. And this, we see on that level 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.

Next question comes from Christian Arnold from Stifel Schweiz.

Just a follow-up on the last bit you just discussed, the R&D. So you expect the R&D to stay on the 7% level. That means this EUR 161 million will go towards EUR 175 million in '23. Is that the way we should think about?

Relatively, we are talking about close to 7%. We have to be realistic. Because product development, the technology challenges will be the driver. And so this is the base for the future positive results and the growth potential. With this CapEx ratio, we are able to, on one hand, finance our growth case on our own, and we expect the remaining free cash flow of 3% to 5% for dividend payments.

Good. Could you remind us about your average price increase in '22? And what are you expecting for '23? So what is baked in your growth guidance of 6% to 10% for '23 in terms of price increase?

So on average, between 3% and 5%, that's the price increase related to different product [ group updates ] on average. So let's say, on average, 4%.

And that is valid for '22 as well as for '23?

Yes. Because energy costs are not [ plenty ] for us. We are, I said, an R&D company. So basically, energy costs are not that. On labor, salaries and wages which will increase, but that you can partly cover with efficiency. And so that's -- and also in comparison with the other competitor, that was the increase what happened globally between 3% and 5% even the Japanese. So...

Okay. And then again, coming back on the situation, inventory situation on the retailer network, can you remind us how inventory levels we have seen in the -- yes, at the retailer network. So they were there at the beginning of '22, I believe. Or the second -- and the first half is probably rather low. And now they are kind of filled up to an average level, above average level. Where do we stand here? How these -- did that develop during '22?

Yes. Maybe let's repeat your last question. Every new model you're launching anyway, you have the freedom and flexibility to set up a new price deck, yes? It doesn't matter that we can increase by then or so. But that's the advantage what we have. Every 3 years or 2 years we are launching new model, then you can adopt the price for them. They have a high flexibility. And for existing running models, we have an average of 4%, so that's one thing. Secondly, inventory, I will see it meanwhile, we have achieved normality, which was before corona. For sure, that means -- normality means also competition starts. Again, that means a certain support for, maybe for [ elder ] models, if you have such in your channel, you have to support the dealer for the retail promotion. So that's the same. In '22 or in '21, 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 have to use for high logistics cost supply chain issues, this and that. And now it's turning around, Normality on the supply chain, efficient production, and you have that freedom or that amount of money to support in case of. So that's the thing. So finally, in total, it's the same guidance what we're always saying.

We have a follow-up question from Mr. Constantin Hesse from Jefferies.

Sorry, I was muted. So 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 and any of the other models? Just a bit of color.

It's some models on the kids bike level. So compared to 65 motocross electric model, 50 cc [ minis ] model. And so mainly products for kids and youngsters, where you have a margin. For sure, in '24, we are launching the latest version of the off-road FREERIDE, which is, I would say, a product for adults, yes. So basically, we are focusing on products where we can get a margin. The rest is on the premium end, 950 cc, premium middle class. We are launching a new adventure-type bike. We are also heading towards that kind of super bike. So as much as we can to gain market share in that premium mid-class and then into 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 the new fuel technology we expect for the future. And in racing, we are already starting with that [ product ].

In '24, MotoGP is heading towards e-fuel. That means in '24, we are using 40% e-fuel already and from '27 onwards, 100% e-fuel just for racing purposes.

Also for the market, we're expecting in the beginning not the 100% clean e-fuel concept but the blending concept. That means you can use e-fuels to blend with existing fuels and increase the level of e-fuels in future. This is our expectation.

That was a bit fast to me. It was -- MotoGP was 40% e-fuel and where was it 100%?

'24 and from '27 onwards, 100%, so it's step by step. Because the mixture of 40%, we have proven it on test benches on racing. You can use it immediately without any technical changes.

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.

Thank you very much for the open discussion. Yes, we have presented. And, yes, we see the outlook realistically but positive. Thank you very much.

Thank you.