Bajaj Mobility AG (BMAG) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the preliminary revenues and earnings in the business year 2023 Conference Call and Live Webcast. I'm Sacha, the Chorus Call operator. [Operator Instructions] At this time, it is my pleasure to hand over to Mr. Stefan Pierer, CEO. Please go ahead.

Thank you very much. Good morning to everybody. Welcome to our presentation of the preliminary result of '23, who we are. PIERER Mobility is the holding company for the brands, KTM, GASGAS, Husqvarna and MV Agusta including also power 2-wheeler electrobikes. We are the biggest European power 2-wheeler manufacturer. As you're aware, we are listed in Zurich. And if we jump to '23 just as a big picture, '23 was a challenging year. Fortunately, on the motorcycle in our main markets, it went very well because North America, Europe, also India growing markets, China flat, Latin America flat. But overall, we did a great job on the motorcycle. So on the motorcycle we reached almost 325,000 units. Only bicycle, it's a different -- it was a different picture because the bicycle after releasing all the lockdowns and coming to a normal life, it decreased to the level of 2019. So the whole supply chain was fully equipped. So margin-wise, already in the first half of the year was heavily under pressure. So immediately, we turned around and reshaped our strategy doing back to power 2-wheeler bicycles, we sold, I would say, [indiscernible] and cheap brand Raymond. We separated failed as a bicycle company, and now we are running clearly on power 2-wheeler products. In total, we did EUR 2.6 billion exactly EUR 2.661 billion, including almost 160,000 bicycles, we ended up at 482,000 power two-wheelers. And on average, we employed 6,200 people, most of them, 5,000 in Austria, the rest abroad. If we jump to the company structure. We have a clear division separation on the motorcycling. We have the brands, KTM, Husqvarna, GASGAS, MV Agusta. And as last year, we deepened our relationship with CFMOTO in China. Later on, we will explain in detail. So we take care for the distribution in Europe for CFMOTO. On bicycle and electromobility products. As I said, we are sharpening Husqvarna, GASGAS and as a new product electric scooter, high-performance scooter from our partner CF. Then on R&D design, it's as always is Kiska, our design company, our R&D and our separated R&D in Barcelona. In total, in this division, we are talking about 1,400 people. So innovation is a very important part, innovation rate. And the next column, you can see our digital and IT structure. It's Avocado, our KTM Informatics digital agency in total we are doing most of all programming for our marketing and websites in-house and separated our very important marketing instrument is racing, Motor sport, where we almost have 400 people, where we are running with the 3 motors brands, KTM, Husqvarna and GASGAS. If we jump, then I would like to hand over to Hubert Trunkenpolz.

Good morning, everybody. And I would like to introduce a program that we have agreed in the Board of Directors, which is called POLE Position. Given the general economic circumstances and also especially the situation in the bicycle industry and the bicycle market. We decided that we will resharp and focus our strategy. So we will not have a change in strategy, but we will have a sharpening in our strategy. And POLE stands for premium, objectives, leadership and earnings. And what this means just very briefly. Premium, as Stefan Pierer was already mentioning, we will -- we have divested the entry brands in the bicycle business called Raymond. And we will focus in general, also in the bicycle business on high-priced premium mountain bikes and high-priced premium e-bicycles. The same also for our motorcycle brands. So in which segment we are active, we always will aim to be in the premium of the market, to command also relevant premium prices and markups. Objective is also clear. It comes along with refocusing the strategy and also having the mindset again in the foreground, which is coming from racing, performance and winning. So this is what we also transfer to all our staff and also our stakeholders in the company. This comes along with leadership. In our case, it doesn't only mean internal leadership. In leadership, we also think about leading the segments, leading the market segments in which we are. And last but not least, I think this is the most important. We have been very much volume-driven in the past. We have reached market shares over 10% in all the relevant markets. We now think that it's time to adjust the strategy in terms of keeping that market shares and have more focus on earnings means we do not buy ourselves market shares. We want to create shareholder value in the future by having focused on earnings rather than growth. This leads me already to the next slide. So here, you see this, I would say, impressive growth that we have seen over the last year. Definitely, we want to keep on growing. We want to stay a growing company, but the times where we have double-digit growth rates are over because it's simply not possible anymore if you would not buy market share. It is not in line with our premium strategy at all. So last year, we had a total sales, including the so-called non-e-bicycles of 438,000 bicycles. Out of this, we have sold 482,000 powered 2-wheelers. So a significant growth compared to the 2022 year. And when we then go more into detail and take a look on the split between motorcycles and bicycles then we see that in the motorcycle business, we sold 381,555 units, what equals a growth of 2% compared to previous year. The growth was more or less carried out by the brand KTM with a plus of 4% and a very, very, I would say, big growth in the region of Europe, where we sold 140,000 units with equals a growth of 15%. In North America, we were considering the high dealer stock and took out wholesale pressure. So therefore, we ended up at 101,000 sold motorcycles, which still is by far the biggest European manufacturer in the United States or North America with that figure. And the biggest growth was achieved in India where our partner Bajaj is in charge for the sales of our products, KTM and Husqvarna. And the Indian market was also developing very dynamic. So there a growth of 29%. Latin America was under pressure where, we all know the circumstances economic wise with a minus of 26%, same in Asia. Australia and New Zealand was flat and Africa, Middle East is a very small region at a minus of 5%. Jumping now to the bicycle wholesale. In total, we sold 157,000 units but [ because ] a plus of 33% to previous years. Out of this 157,000 were 56,000 bicycles and 100,000 e-bicycles. So these figures look from the first look extremely positive in terms of unit sales, what they are. But a big portion of them is also credited to the sold out and reinvest of the brand Raymond. And the volume, so to say, was not in line with profit because most of the -- or many of the bikes sold, were sold with almost no margin or even negative margin. When you jump to the next one, dealer development or a dealer network development. We have to do a massive effort in building up MV Agusta dealer network. We were quite successfully in now implementing 142 MV Agusta dealers, which are real MV Agusta dealers. So we call them ready to invest. So this means these dealers are not only -- have not only the financial resources and proper showrooms for it and also connected to our IT systems. On the other side, we were increasing the number of KTM dealers decreased a little bit the number of Husqvarna dealers, we had to put more focus on quality of the dealers and also we had an increase GASGAS dealers. So all in all, we have 4,760 motorcycle dealers. We've communicated earlier that the target is 5,000 motorcycle dealers, giving the circumstance that we still missing 200 -- at least 200 MV Agusta dealers, which we will bring into business over the year 2024, then we are heading towards the target of 5,000 dealers pretty quick. Same with the bicycle dealers massive increase, as you can see. Here, we will also have a lot of focus on modifying dealers. We will not sell our products to retail chains, we will focus on the specialized independent bicycle dealers and much more focus again on the second or the exclusive distribution channel via our motorcycle dealers that we have in our network already committed to sell also bicycles. So thanks to our strategic partnerships.

So we shared it because Hubert takes care in China, and I'll take care in India. Our meanwhile strong Alliance with Bajaj is lasting almost last 17 years. So has built up very nicely. So we have agreed for the upcoming year that we separate the distribution organization in Bajaj, we separated as a KTM operation. So shareholding wise nothing will change, but we are going to evolve in that. We are signing also an MD for that to bring in more experience, more knowledge, especially on the offered segment because Indian market is the fastest growing one. They are benefiting out of the Russian war to the cheap energy prices and the premium market is growing fastest. So that means we have to make a strong involvement. Secondly, we already have the third generation of our joint products. Start of production happened in December. So we expect for this year a good figures on that. In India, it's well perceived. And in addition, we agreed to develop a new joint platform, a 2-cylinder 500 350cc. So that part is going very well between Bajaj and KTM PIERER mobility. In China, it's almost similar, Hubert?

Yes. We just have [indiscernible] return from China quite a last week and perhaps the new insights of the cooperation or strategic partnerships while we see motor is really going well and strong. We enlarged this partnership to a cooperation also in research and development, other strategy, industrialization and we were, again, deeply impressed about the possibilities which are offered through this partnership in the CFMOTO in all this respect. China is definitely ahead in the technology of all electric vehicles. So therefore, we also decided to move the development or most of the development electric bicycle to CFMOTO and produce and develop joint product out of this corporation. Also, we have agreed during the last months that our group will take care for the distribution of CFMOTO products in most or the most relevant regions in Europe. Same as CFMOTO is distributing KTM products in China. So this is a very strong and fruitful partnership meanwhile and out of this, we also decided to increase the production capacity in our joint production facility from 50,000 units currently up to 100,000 units during the course of the year.

Coming back to Europe, our strategic alliance or strategic partnership with Maxcom in Bulgaria. The Maxcom is reassembling all our power 2-wheelers for the market due to the adjustment of the strategic plan instead of going to big volumes focusing on quantities on the premium segment. I think it's the first positive outcome in our joint investment, don't have to do the second step to invest in a second production facility. We can use the existing one because also third parties are going down at Maxcom. So in the future, we don't need an additional assembling factory in Bulgaria. We can use the facility from our partner. Secondly, our joint facility for logistics, we are using as a logistics center for incoming and outgoing products. It got finished by September last year. It's working pretty well in cooperation with our logistics partner, Legamax. So that's on a good way. If we go to the next slide. I think you can see our global footprint of production. And that leads me a little bit on explanation what's going on with Europe. Due to the high inflation rate, especially in Central Europe, Austria, Germany and the high increase of labor cost here, the global companies from Europe, they have to react or does it mean for the PIERER Mobility? It's clear. We are going to -- in India anyway we already since a decade, but we are enlarging our activities in China. We're transferring the mid-class segment, that means not just the 700 also the 950. And secondly, I think that's the biggest new change in that we're also transferring a big part of our electric development department to China. So that's the ongoing thing. That means throughout this year, for sure, we are going down by 3 up to 400 people due to the fact that we transferred quantities to China and also R&D capability and capacity. So that's the big picture. So we have in Hangzhou, we have a good working factory, which currently 34,000. We agreed in our last visit that we put in additional products so that the next 2, 3 years, we're going up to 100,000. India, anyway, is an endless capacity. And in Europe, we are focusing on the premium models in the off-road, that means 230,000 what we had on a week will go down to [ 160,000, 150,000 ] focused on premium models, small quantities and off-road high-end. So in addition, we have our tax avoiding CKD or CKD operations. The biggest one, minimally is Philippines, where we want to enlarge because from the Philippines, you can also sent completely built-up motorcycles above 800 cc to India, which is a real benefit. Then in Latin America, Colombia, in Brazil, we have decided in the future to do it on our only reassembling in Manaus and Argentina. Let's see what's coming out of the new President. I think it sounds optimistic, but currently, it's carried out in Argentina. And we have a small operation in Spain, with GASGAS where we are doing our trial products already 5,000 units last year. We are always adding on small electric kids spikes. So that's working very good. That's our global footprint. But as the main message, Europe comes down and enforcing China and India.

All right. So maybe over to our brands. As already mentioned in the earlier presentations, PIERER Mobility and its brands itself also as a house full of brand, We decided already more than 10 years ago that the European strong brands must be clearly positioned. And not to give up this clear position we added more brands to the portfolio in order to reach additional customers without cannibalizing the other brands. So everything started with KTM and KTM is worth motorcycle brand, racing brand with purity, performance, adventure, extreme as brand attributes and therefore, very clear positions and has fan based all of the global ones, they call themselves Orange Breeders, and we will speak maybe even reach up this position. Different in Husqvarna, even using technology from KTM, especially engine technology, with completely different ergonomics design and setup. So we have achieved a completely different motorcycle lineup. And this works very, very well because we reach other customers, which have an other focus in understanding the motorcycle ridings in the KTM guys. With brand GASGAS, we go very much different direction in the future. This will be the young brand in our portfolio. Also, the product portfolio will go much more towards younger people, fun and inviting will be one of the brand attributes. And therefore, with GASGAS, we are very keen that we also can reach customers which we would not be able to reach with KTM and Husqvarna. Last but not least, MV Agusta you know that we have 25.1% of the shares of the production company. We have controlled about 100% of the distribution and the purchase meanwhile. So we are in the lead of all the operations. And also, we have announced that we will execute the call option to go into majority the latest in 2025. I think MV Agusta is clear, it's the luxury brand in the portfolio with a lot of potential. We are just in the process of setting up standards and more visibility to the company. But all in all, we are very well on -- mentioning earlier, we have agreed to take over the CFMOTO distribution in Europe. Most of the CFMOTO products are also using KTM technology. For us, it's an entry brand in the motorcycle distribution, where we will approach for sure Suzuki dealers and other dealers which we have not reached so far.

Okay. Also good morning from my side. I would like to start with an overview about the development of our employees. I think what you can see, especially what happened in '23 was the consequence of the switch in the strategic focus. When you see the development starting from 2020 to '22, we hired in total more than 1,500 people. And from last year to this year, it was only 96 people, employees. And if you consider the circumstance that we also recruit 75 [ franchises ], then you see what happened in the last year. We also started to decrease our employees numbers in the second half. I think what's worth mentioning is our apprenticeship program. We will continue with this program as the backbone for our skilled workers and employees. We're also a very young company as compared, I think with other companies in the industry, our female share with almost 26% is very high. Now coming to the facts and figures of last year. As my colleagues mentioned before, we achieved another record year in regards of revenue with a plus of EUR 224 million in sales. But if we come to the margin, you see that we suffered last year. What are the reasons for that? There are several ones. In Europe and especially in Austria, we are facing high salary and wages increases over the last 2 years, and this had an impact on our EBIT margin of almost 1.6%. It was also necessary to fight against our competitors in the market to gain market share as my colleague Hubert mentioned before. But this resulted in additional discounts, which were needed in '23 and which had an impact on our EBIT margin of another 3.2%. In opposite of that, we were able to reduce already costs and increase productivity but we were not able to participate or to anticipate this for the whole year, but it had a positive impact until now of 1.1%. So in total, when you compare the margin development, we closed the fiscal year '23 with an EBIT margin of 6% and an EBITDA margin of 12.2%. There is an additional impact when we come to earnings before tax. These are the interest rates. Why? Our financial results decreased last year tremendously. Why? Because we were forced to support our dealers via long payment terms to also slow down the increase of their financial impact because of the high interest rates. This was necessary to support the dealers and also to gain the market share as my colleague mentioned before. Now when I come on the next slide to the segment. I think this gives you an overview and also shows you the necessity of this strategic switch focusing on power 2-wheelers and step out of low-margin bio bikes, which ended up in the sale of Raymond. While when you see the motorcycle segment, EBIT margin of 8.9% is considering the impact, which I mentioned before, higher personnel costs, higher discounts, I think was satisfying and was within the original guidance we set out last year. The bicycle segment, itself was very difficult for us because of the reason you've heard it before. And this influenced our earnings by almost EUR 50 million. And this is also the reason why we step out of this classic bicycle business, and we focus on power 2-wheelers with our brands, GASGAS and Husqvarna. Having a look on the balance sheet numbers, due to the circumstance that we had to support our dealers with longer payment terms, we had also an impact on the balance sheet total. And we also supported our suppliers with shorter payment terms or with financial instruments to support or to stabilize the liquidity situation. And this ended up in a lower equity ratio than we had in the previous year, increased our working capital. As you see here, almost tripled our working capital compared to the last 2 years and then also an impact on the gearing number. This action we took for purpose, it was clearly communicated. It was also necessary to stabilize our supply chain on one side and the dealer network on the other side, but it had a negative impact on the free cash flow, as you can see here in the bottom of this chart. I think it's necessary to mention that we stick to our investment program in regards of product development. We also increased in '23 our activities in that area by almost EUR 30 million. But nevertheless, we believe that this is important and necessary especially to compete with our competitors in the future. On the last slide, the development of the free cash flow, I don't want to repeat all of it, but you can see here the summary of what I've mentioned before. The increase in working capital for sure, influenced our cash flow of operating activity by almost EUR 400 million. We continued with our investment program as we did in the past, but it had a negative impact on the free cash flow by almost 20 million. So the deviation compared to last year is explained by these 2 concerns. That is 2 circumstances and we are absolutely important for our strategic focus in the future. So this was in a nutshell. At the end of our presentation, I would like to hand over to Stefan again to explain the strategic outlook.

Yes, it's a wrap-up or summary. Refocusing on premium brands, that's clear KTM, GASGAS, Husqvarna and MV Agusta, it could happen that we are coming close to this, it could happen. So that's clear. On the -- basically, we focused just on PTW, that means power 2-wheelers bicycle not anymore bio bicycles. On the electromobility, we're deepening our strategic alliance with CFMOTO. So a lot of new products, especially under the brand and GASGAS will show up and intensifying also our strategic partnership with Bajaj. I think that's basically a must and also very, very important because on the European side, it will go on. The inflation will stay high, interest rates, hopefully, it will come down, but we have to react immediately. We have to strengthen and coming back to good profitability, that means between 8% and 10%. So that's clear that it's working together with our global partners in India and China. And honestly saying it's also had to have from these different regions because we have a Chinese and an Indian partner, you can balance out your interest. So that's basically what we have for this year and cost reduction in Europe as much as it gets. So that's my final wording. So Q&A is open.

[Operator Instructions] The first question comes from the line of Hesse, Constantin with Jefferies.

Number one, I'd like to start with the bicycle segment. I think what you mentioned was that most -- a lot of the bicycles were sold with basically no margin at all given the discounts that you had to do. Was that across the portfolio or primarily bicycles only, excluding the e-bikes? And if you could potentially give us a bit of an update on how the environment is currently looking like on the e-bike segment, especially around pricing as well. Have you seen any positive developments there? That's my first question.

Okay. So you can pretty easy explain that the cheaper the bicycle is the less it was under pressure. So this is why we focus on the [indiscernible] under pressure. So this is why we really focus on premium in the future because what we have seen everything below EUR 3,000 retail, especially what we was carrying out there is the brand Raymond, we had to heavily discount because it's a kind of commodity. And therefore, the outcome is the resharpened strategy. What you will see in the future in terms of e-bicycles from our group under the 2 brands, GASGAS and Husqvarna will also benefit technology-wise from what have learned in the motorcycle, especially the off-road motorcycle over the last year, when it comes to suspension, braking systems, et cetera, et cetera. So we really clearly want to separate ourselves from the volume and mass makers. And therefore, it was necessary to get rid of the cheaper products. In general, this is also in line when we take a look on how is the pipeline filled. And there also, we see that more premium that bicycles are, the less is in the pipeline. So we already see demand on bicycles model year 2024 and 2025 with a higher price tag because, obviously, the dealers are not overstocked with this kind of -- the lower you get, the more stock the dealers are still carrying and the fuller the pipeline is. So therefore, we will, for sure, take another almost a year to clean out the pipeline with the low-priced bicycles. With the high price, we are much more optimistic. We see this already between 3 and 6 months that there will be -- yes, I would say, the market is coming back more to normal.

Understood. What's the -- just to understand what's the typical holding time of bicycles in inventory usually?

The rolling time? Holding time? Yes. It's at the moment, the cheaper they are, the longer they stand. So we're a year at the moment.

At the moment, a year, I would say.

For the premium months?

Half a year.

Yes. Maybe not even because if you buy a top premium, you have waiting time already, again, Yes.

Sorry, I mean, what's the usual holding time, sorry, not what's currently?

I would say, over 5 months at least. It depends a little bit on the seasonality. I would say, spring time and summer time shorter autumn/winter, winter is a little bit longer because of the weather conditions.

Understood. Okay. Quickly on to the balance sheet. I mean, free cash flow was pretty under pressure in 2023. If you could comment maybe on your debt covenants. And if you could provide us with any commentary around free cash flow for 2024. That would be great.

I think with our numbers, we are always in our covenants we have in place. So there is no additional need for let's -- for example, for equity increase or something like that. So we are within our guidance, within our covenants. The cash flow position for -- or the free cash flow position for this year should come back to I would say, normality, we will see how successful we are to reduce especially inventory on the dealer side, how big the demand from those is to support them in addition, but we expect to come close to, I would say, close to 0, maybe positive...

Okay. Understood. And then just quickly on this strategy to go further to China, how are you assessing the potential geopolitical risk here? I mean, with Europe already investigating the import of EVs on the automotive segment. Is there like any risk that you potentially see here in the future when it comes to electric motorcycles and the import of such to the U.S. or even to Europe?

We do not see more risk than with anybody else because if you are in China, then this Taiwan topic is, of course, seen from a different point of view. And in China, everybody is 100% aware that the conflict with Taiwan or serious conflict with Taiwan would heavily affect the Chinese economy as well as the U.S. economy as well as the global economy. So we do not really see this escalation in the near future. Of course, we cannot predict what's going to happen. But talking with people there, over there and as well as Taiwan as well as in China, I think this has more attention in the European and American media than in Asia.

Another thing, I'm not in charge for the European unit. But as a global European company, you must team up in China. Otherwise, you get -- you are disappearing. And secondly, due to the fact that we have a sampling and production facility basically everywhere, I can find a way around because just, for example, the 790 engine is produced in China is delivered to Austria. And now we are doing in Austrian Husqvarna 790. So and I think if you were acting quickly, immediately with some smart moves, you're are on the forefront.

And just to give you an example, 90% of the parts for all Apple products are coming from China. So I would be surprised how this should go to block that because then, one of the most valuable companies in America is there.

Understood. Just for clarity then, the smaller sizes are going to be manufactured in India with Bajaj, mid in China and the premium in Europe.

In Europe. So that's the strategy what we are running on a motorcycles. As long as it gets, we keep Europe, it is clear. But stupid politicians and all the surrounding is not helping.

The next question comes from the line of Christian Brown with Finance of [ Vicat ].

I have 2 questions concerning the dealer problems. First, it has been many years since we have seen an interest rate increase like this one. And I, therefore, was wondering whether this weakness of dealers is the usual phenomenon in times of increasing interest rates? Or did they just have become weak and careless because of this years of low interest rates. And the second question is, you mentioned financial support for dealers, extended payment terms and high discounts, have there also been loans to support them?

The one goes along with the other. So high interest rates are affecting the business on 2 ends. First of all, retail financing is more expensive. And this is especially a problem in the United States, where most of the products are retail finance and my interest rates, of course, is not helpful. So therefore, we have to make -- bring promotions into place to ease this cost of financing and give the consumers more appetite for buying motorcycles. On the other side, high interest is also, of course, causing a problem in dealer financing, the flow of financing facilities that we have in place. And also, therefore, you must imagine the dealer has a margin of 15%, yes. So out of this margin he has to give some discount away to the consumer. So maybe let's talk about the remaining margin of 10%. So it makes a big difference if the dealer has to pay 1% interest or 5% interest for financing stock. So this is also something where we have to help. Any addition, Viktor?

Coming to your question loans to the dealer, short-term loans, yes, if they are needed to prolongate the payment term, but no long-term loans.

And regarding the -- after a decade of low interest rates or without an interest rate, the whole economy got used to that honestly saying. And that extremely fast increase 10 times within 8 months from the European Central Bank is hurting European industry or European economy heavily I can tell you. And that's the reason sooner or later they must come down with on a certain extent with the interest and otherwise, it gets damaged the European economy.

[Operator Instructions] The next question comes from the line of Christian Arnold with Stifel.

The question on the end markets. We have seen a very solid performance in Europe, clear growth here, kind of stagnating market in North America decline in yes, Latin America and Asia for your motorcycle business. What do you expect for the '24 in terms of these markets?

In Latin America, it's difficult to predict how Argentina will develop at the moment. And Argentina is an important market for us, always was and still is. For the other markets, we are very optimistic. For example, in Colombia, we changed the distributor and also our setup. In Brazil, we just decided to reopen our sales subsidiary in Sao Paulo because we also see potential there. We are pretty optimistic that we can offset in these regions, what we eventually will lose in Argentina, nobody knows at the moment, maybe Argentina also turns out to be a positive surprise. It's an economic experiment that we see at the moment there with a non-predictive outcome, but the rest of the region is -- it should be better than in 2023. In Asia, the number that you see in decline of wholesalers is misleading because what is in line with our premium strategy, we pulled out some businesses where we only sold cheaper motorcycles with lower margins and focus also here in Asia, especially on the premium products and also more expensive motorcycles. So what we will see is maybe a stagnating number in wholesales or units, but a decrease in turnover and profit in Asia. So this is the strategy for Asia.

In North America, we expect a flat market because the Americas economy, it looks like it's off planning. So far, they are doing very well. In Europe, we are also expecting a flat market because that increase what we had last year, we don't see that is repeating. But what's really curious is that the premium or the motorcycle is still a product which is in the focus of the customer, yes? That's the opposite to bicycle. Bicycle is not really the thing, what do you need. That means vacation on a premium and motorcycles are still on a very, very good demand.

Still the mega trend that we also have seen before COVID was playing into the business. The mega trend was always that the power tool is replacing steps by step the car as a commuting tool is a -- yes as a tool that avoids traffic jams, the parking place programs, it gives you more flexibility also weather conditions are changing. So the mega trends towards the power 2-wheeler is unbroken is ongoing.

Then on wage inflation. So your personnel expenses had a negative impact of 1.6% on EBIT margin you told us before. I believe this pressure will remain in '24, right? So wage inflation is also a big topic for '24. Could you quantify what do you expect?

I think we will face the same impact in total numbers on our earnings than we faced last year. But as we published in our last press release, we started a sharp cost restructuring program to compensate these additional costs. And this high wage increases also had an impact on our strategic focus to transfer activities to our strategic partner in India and in China. And honestly saying such a tough situation is squeezing us and focusing very much on this new strategy. You can imagine what I have to explain to the Austrian politicians and to the community that we said we go to China and India, although we still have good profit, yes. But that's the problem of Europe and also it's on the leading edge on the inflation rate. The net income for the employees is still higher than a year before but it doesn't help. It's just the -- it's not a solution for Europe. And if you're doing in whole Europe like that, the industry is disappearing which anyway on energy-intensive industry, it's on [indiscernible].

And maybe a last question on your margin guidance. In your press release, you were talking about this 5% to 7%, which you expect for '24. Is it fair to assume that the motorcycle business you aim still for your 8% to 10% target margin?

Yes.

So that implies that the bicycle business will still be loss [indiscernible] , right?

As in the press release, really restructuring and focusing by this on the way, that means it's not finished by the end of January.

Next question is from Michel [indiscernible] with Bellevue.

Just a quick question actually coming back to the bicycle business. I was just wondering if you could maybe quantify the turnover in the e-bicycle business in '23? I think it was 146 million in '22. And this year, I mean, you've indicated the units breakdown between bicycle -- between e-bikes and non e-bikes, but not the turnover, so just to have an indication on that.

So the total turnover was 240 million, for the bicycle business [indiscernible] and 2/3 were e-bikes and 1/3 was non-e. But the non-e was influenced by the sale of Raymond. So most of the bicycles we sold were Raymonds in that segment. And this was also the reason for this focusing on the 2 other brands.

Yes. Okay, I see. And the other question I had on the working capital. I mean, as you said, '24 will be a year of normalization on the free cash flow side. So obviously, we should see a decrease of working capital. But just looking at ballpark figures in '23, you had roughly EUR 0.5 billion in working capital in '24 with your assumptions of a flattish turnover. Where do you think roughly speaking, we could end up in terms of tied up working capital basically from those EUR 500 million?

I think the big question on that will be the stock situation on the dealer front because this is a huge influence on our receivables. I expect a reduction. It will be not on the level of what we had in '22 and '21 but I assume that maybe it should be something in the middle. It's not our target.

Okay. And maybe the same question on the CapEx side. I mean, you've reached a peak of, I mean, close to EUR 300 million in '23 total envelope, let's say. Is this going to decrease slightly in '24 or are you still on those high levels?

It should decrease. Why was that big in '23. You remember, we opened in April last year, our headquarter in the U.S., which was the largest investment outside Austria ever in our company's history. We opened the logistic hub or the joint venture in Bulgaria, which was also in I would say, an investment of about EUR 40 million in total. So EUR 20 million were within this year. We had to invest in our new dealer software called [ Telenet ], which will have an impact of EUR 15 million. and we enlarged our R&D activities. So these were, I would say, peak situations in '23. And here, we should find a normal level in '24, which should end up in a reduction of the CapEx level. And what's supporting that is the strategic decision to move also R&D activities to China. It's also helping.

So are we going back to a level of, I don't know, EUR 250 million, EUR 260 million, something like this or as an indication?

'24, '25 yes. In '25, yes. In '24, if you cannot stop an R&D project immediately. If you have to finalize these projects, if it's from an economic perspective, wise to do this. But there should be a slight reduction in '24 and the bigger reduction in '25. No it's so sound.

Okay. And maybe just a point of detail on the minority line, it seems that in European it seems you had a positive impact this year of close to EUR 4 million. What was that related to?

The minority impact. There are the -- it's China, but we have also our joint venture in Bulgaria, we have minority interest. We have on the Philippines, minority interest. So there are some smaller participations where we have minority interest.

mainly it's coming from the Chinese CV.

The next question comes from the line of Mark Littel with Vontobel.

The first 1 is you just talk about CapEx just wondering when you said it will come down, does that mean in absolute and relative terms. So even if we expect '25 to grow again, CapEx would then come down both on absolute and relative terms. The second one is on the margin guidance, again, for '24. Can you tell us what is the charges you think for the reallocation and the production shift and how much that affects multi-cycle margins. And the third one is when you say free cash flow development should normalize. So does that mean back to the 3% to 5% of sales levels already '24.

So your last question, free cash flow, 5% to 7%, I don't see at the moment. I think this is too early to predict now, as I said before. The biggest impact on this number is the demand from our dealer network to support them. We expect a positive influence on that. But estimating the real impact, it's too early now. So we will see. I would say in April and May, we have a very clear picture on how the direction goes. CapEx wise, yes, for sure, in '25, it should be in absolute numbers and a decrease and in relative numbers and increase also a decrease, sorry, as I said before, we had over the last 2 years, several impacts on that figure. To repeat it, it was the headquarter in the U.S. It was our joint venture in Bulgaria. We started our investment at MV Agusta. We invest a lot in our R&D and our product lineup. When I go back 2 years ago, it was EUR 44 million, for example, less than this year. We had to invest in our IT infrastructure. I mentioned the [ Telenet ], which is our communication tool to our dealer, but we've also invested a lot of money in our security systems. So there are a lot of extraordinary items which had an impact in '22 and also in '23. I think does this cover all your questions or?

Yes, thanks. No, the third one was on kind of the -- on the margin guidance for '24, 5% to 7%. What is kind of the extraordinary charges of this restructuring that reallocation? Is that kind of mid -- kind of how big is the charge talking about EUR 40 million to EUR 50 million we have to assume, which are -- would fall away in '25.

Look, I think our target in motorcycle business is to stay within the original guidance between 8% and 10%. This is the target. The actual guidance is 5% to 7%. So I think there is room for restructuring the bicycle business, and there is room to cover the cost, which comes along with the strategic shift towards our strategic partners in India and in China. And how this develop, I would say, since we will see in the upcoming months.

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

Just very quickly on the bicycle segment. Are you making any margin at all on the -- so obviously, I would assume that most of the loss is driven by the traditional bicycles. But on the e-bike segment, excluding that low end, are you already profitable at all? Or is that still loss-making?

I think it depends what you mean is making a margin. If we come to an EBIT level at the moment, not clearly saying, but this is the reason for the strategic shift on the gross margin. In the e-bicycle business, we have a slight margin, but we have a margin.

Okay. But slight margin at [ 100,000 ], it's a slight margin.

No, it's a little bit more for sure. You might see that we sold 100,000 electric bicycles last year. So for sure, there is a margin.

And also the higher price e-bikes were the higher the margin loss. And in the top range we had the margin.

Yes, we have a margin, but you have to cover business restructure and you have to cover development costs. And this is -- as I said, the if you count margin on the EBIT level, no, if you count margin on a product level, yes.

Okay. And to get EBIT positive, what kind of scale do you need to have here?

Yes, I think this is what we are doing now, yes, we sold Raymond. We stepped out completely of the, let's call it, bio bicycles, meaning we also will sell [ felt ], which is, for sure, a profitable brand. But nevertheless, it's out of our strategic focus. And we focus on our 2 brands GASGAS and Husqvarna, sharpening the product lineup and come and increase the profitability in these 2 brands.

Maybe to explain when we started with the bicycle strategy, where we had a huge quantities might we have structured a separate independent division with, I would say, 150 almost 200 people to cover Europe and the global market. Due to the strategic decision to integrate it and reduce about 2-wheelers, that means we are reducing people at least 120, integrating in the existing organization in all safe hubs. So that's our restructuring costs. If you reduce 120 people you have to pay something. Fortunately, we are in Austria, not in Germany. But anyway, you have to pay for that. And that's what Viktor meant or explained in his.

And also on the product side, what we have in mind is that even if we talk about e-bikes, but we will talk about real power 2-wheeler. So it's not this commodity feedback for Husqvarna, we will go very much into urban mobility with products which are separating from that what is on the market so far. And with GASGAS, we go into high-end of biking. And as I already said, we are the market leader in off-road motorcycle. So you can trust us that we know how to make a proper suspension and braking system for such products. And this is where we see us in the future in the e-bike business and leave the [ MS ] market to the others.

And maybe to explain in addition, we are setting up or we set up also close relationships with main suppliers. So with [indiscernible] , we have a close relationship with GASGAS. So we are using exclusively [indiscernible] doing joint developments, even on the powertrain and on Husqvarna, which is urban and the city bike and very European-focused brand, we have on the power train and a relationship with Bosch. So that's it. Nothing else. We don't have any more Japanese manufacturers. That is also part of the recharge strategy.

Maybe just ask just one final one in terms of a potential time line here. When do you expect this business to potentially become profitable at EBIT level? Is there any time line or?

It must happen by the end of this year. Otherwise, it's not a restructuring. That's what I learned.

2025.

Its 12, 15 months.

Okay. Sorry. So the EBIT -- the negative, the loss that you're making in EBIT is because of the restructuring charges and not...

Mainly on that and that's -- it's part of the game. You must pay for that.

Fine. So because my question was in normal operations is the e-bikes business profitable?

It's based on the ground at it's profitable, it's still on a margin level, but we explained between 4% and 6%. And the more you are heading to its premium and more you are heading towards the motorcycles.

Loss comes out of the restructuring.

The next question comes from the line of Miro Zuzak with JMS.

I have a question regarding the capitalized R&D. You have between EUR 400 million and EUR 500 million of capitalized R&D on the balance sheet as of end of last year. Is there any shares or any risk that you have to write off some of it now with all the changes that you're applying on your business structure?

No. Because we do not capitalize R&D costs for the bicycle segment.

We didn't do that. And it's on the motorcycles, it's checked every year based on the lifetime and the quantities. So that's on a motorcycle, nothing has changed. And the bicycle as the beginning, we didn't do something. It was always written down.

Okay. And then a second one, it's a follow-up regarding the net working capital related to the question Misha asked before. So if you talk about the normalization now in 2024, do you mean like that the change in net working capital will be -- come close to 0? Or do you believe that the level of net working capital will normalize and hence the change in net working capital, the level will be negative, so it will come from EUR 500 million down to EUR 300 million or so again or EUR 200 million and the cash flow effect will be positive.

When I talk about normalization, I mean this is the level of net working capital. So in '23, we had an extraordinary high level because of the reasons I mentioned before, dealer network support and so on. For '24, we expect here a reduction of the level of working -- of net working capital because we expect that the payment terms towards the dealers will go down. So the DSO should be reduced during the year, meaning we can also fully utilize our ABS programs we have in place, which should have a positive impact on the net working capital.

Okay. And the order of magnitude, I mean, will be then like EUR 300 million or so in motorcycle segment.

Last year, we had EUR 200 million last year, meaning 2022. In '23, we had EUR 500 million. So I would say something in the middle.

There are no more questions at this time.

Okay. Thank you, everybody.

Thank you for the communication and the Q&A and one of the others, we see each other, today and tomorrow. Thank you very much.

Ladies and gentlemen, the conference is now over. Thank you for choosing Corus Call and thank you for participating in the conference. You may now disconnect your lines. Goodbye.