MotorCycle Holdings Limited (MTO) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. My name is David Foster, and I'm the Chair of MotorCycle Holdings Limited, and I will chair today's Annual General Meeting. On behalf of the Board and executive team, I'd like to welcome and thank everyone for attending today's meeting. Today's meeting is being held online via the Lumi platform. This allows shareholders, proxies and guests to attend the meeting virtually. All attendees can listen to a live webcast of the meeting. In addition, shareholders and proxies have the ability to ask questions and submit votes. [Operator Instructions] Please note that your questions will be moderated by our company Secretary, Nicole Spink, who will read out the question. If we receive multiple questions on one topic, these will be amalgamated. Finally, due to time constraints, we may run out of time to answer all questions received. If this does happen, we will answer them in due course via e-mail or by posting responses on our website. Voting today will be conducted by way of a poll on all items of business. In addition to provide you with enough time to vote, I will shortly open voting for all resolutions. Once the voting is opened, if you are eligible to vote at this meeting, a new polling icon will appear. Selecting this icon will bring up a list of resolutions and present you with voting options. To cast your vote, simply select one of the options. There is no need to hit the submit or enter buttons as the vote is automatically recorded. You do have the ability to change your vote up until the time I declare the voting closed at the end of the meeting. Should there be a break in our technology, we will work to come back online within 15 minutes. However, if this is not successful, we would defer this meeting to another date and time to be advised. The meeting has been called under the Notice of Meeting dated the 26th of October 2020. The details of which were sent to all shareholders. If there is no objection, I propose to take the notice as read. A copy of the notice can be found on the meeting homepage. It's now 11:03, and I have been informed by our share registry, Computershare, that a quorum is present, so I formally declare the meeting and the poll open. Are there any shareholders that wish to have an apology recorded in the minutes of the meeting? If so, please submit the member's name as a question, and this will be recorded by the Company Secretary. I'll just pause for a few moments. The polling icon will appear soon. Please submit your votes at any time. I will give you a warning before I move to close voting. In addition to those present today, valid proxies have been received from 52 shareholders that represent 42.79% of the vote. So firstly this morning, I'd like to introduce the Board of MotorCycle Holdings and Senior Executive team of the company. David Ahmet, the Founder, Managing Director and CEO of MotorCycle Holdings; Warren Bee, who's been a Director of MotorCycle Holdings since 2011 and is currently Chair of the Nomination and Remuneration Committee; Rick Dennis, who joined the Board in 2016 and also chairs the Audit and Risk Committee; Peter Henley, who has been a Director since March 2017, and has also been appointed a member of the Audit and Risk Committee and Nomination and Remuneration Committee and is the company's representative on the Board of MotorCycle Finance Joint Venture; Rob Cassen, who was appointed to the Board in October 2017 and has also been appointed a member of the Audit and Risk Committee and the Nomination and Remuneration Committee; Bob Donovan, our Chief Financial Officer; and Nicole Spink, our Company Secretary. I'd also like to welcome Simon Crane, the audit partner of KPMG, the company's auditors; Stephanie Daveson, partner of Clayton Utz, the company's lawyers; and Kristen Jiear, our representative from Share Registry at Computershare. Today's meeting will proceed in 4 parts. Firstly, I'll provide an overview of the key highlights and achievements for the past financial year. This will be followed by David Ahmet, who will review the operational performance and financial results of the company for the past year as well as outline our expectations and plan for the coming year. Following this, you'll be able to ask questions about the company's financial results, operations and market outlook, which are raised during my address or Dave's presentation. This will then be followed by the formal business of the meeting, at which time, I will take your question specifically regarding each of the proposed resolutions. So it does give me great pleasure to address you today and outline the progress of your company. Despite challenging trading conditions during most of the year, the company achieved improved financial and operational results, and we continue to outperform the market and grow our market share. The strong results were driven by a solid increase in sales for new and used bikes, a lower cost structure, expanded product offering, improved dealer network and COVID-19 support programs. All of us are no doubt highly aware of the market volatility that has characterized the 2019/'20 financial year due largely to the global impact of COVID-19 pandemic. Despite our initial concerns about the impacts of the COVID-19 pandemic, the company's performance in the last quarter exceeded expectations and was primarily driven by a sales resurgence in recreation and leisure products on the back of COVID-19 restrictions, combined with management's decisive and quick action to cut costs and reduce inventory. Evidently, the COVID-19 pandemic has changed consumer attitudes toward outdoor leisure activities with a renewed interest in motorcycles across numerous market segments. This has been reinforced post-July this year as sales results continue to be strong as the country moves out of COVID-19-related restrictions. It's important to recognize the strong results this year are not solely due to the sales increase from COVID-19. Our performance, excluding JobKeeper, exceeded budget and last year's results. The company's solid performance in this year's challenging environment is an outcome of the management team's agile response to the uncertain market conditions combined with a disciplined focus on improving operational productivity and lowering the company's cost structure and driving sales performance across the network. The company's performance in the last financial year exceeded expectations, and we have continued to develop our position as the largest motorcycle dealership and accessories group in Australia. The strong financial results were achieved through expanding the network, reducing costs extensively across the group and significantly growing our underlying EBITDA and profit after tax for the year. The company's revenue increased 10.3% to $363.7 million with solid contributions across each business division. Net profit after tax and before impairment increased 81.8% to $15.2 million, up from $8.3 million for the previous year. Importantly, we were able to improve our net debt position considerably and finished the year with $39.5 million in cash, up from $9.2 million the previous year. We decided to take a noncash impairment of $24.3 million against the carrying value of the wholesale segment's intangible assets, principally goodwill from the Cassons' acquisition. There is no impact on the company's debt facilities or compliance with our banking covenants as an outcome of this impairment. Due to the improved trading conditions, your directors decided to declare a special dividend of $0.05 per share, amounting to $3.1 million paid on the 30th of September 2020. The Board fully appreciates that shareholders would like the company to return to paying regular dividends, and this is under consideration in view of the company's performance, lowering the business' cost structure and reducing debt, while ensuring the company remains able to take advantage of any future growth opportunities. Reducing debt has been a major priority throughout the year and the company's strong cash position enabled us to reduce debt by $20 million. We also paid out $5 million bailment on all bikes incurring interest and are involved in discussions to repay our remaining bank debt and maintain a facility of $20 million. Net debt will remain under $10 million as used bikes and accessory stock is replenished over the year. Your directors are cautiously optimistic about the forthcoming year due to the renewed interest in motorcycles and -- as a great leisure product. However, the current heightened sales demand momentum is expected to temper particularly if there are future shutdowns driven by COVID-19 pandemic. In Victoria, for example, 6 stores were unable to open during the lockdown. There are expectations of pent-up demand as these stores reopen. While, we expect the current -- sorry, the financial strength of the company driven by our diversified revenue streams, puts us in a strong position to both manage future market volatility and to take advantage of future growth opportunities. Our strategic approach over the coming year will be to continue our focus on driving operational improvements across all business units as well as continuing to broaden both our product offering and geographical footprint in new locations. This ensure we'll continue the upward growth trajectory of sales in both new and used motorcycles, and retail and wholesale accessories as well as maintaining our program of reducing overheads and lowering our cost structure. With reduced debt, strong cash reserves and a resilient business model, MotorCycle Holdings is well positioned to continue to achieve solid growth and strong results. I'd like to sincerely thank the management's -- the company's management team and employees for their ongoing dedication and contribution. The results this year are a credit to them and are due in no small part to the management team's agile response in the early stages of COVID-19 pandemic that created unprecedented conditions through 2020. Their commitment and considerable efforts ensure the successful delivery of the company's strategy of improving operational productivity, lowering the company's cost structure and driving increased sales. There were some hard decisions needed to be made earlier in the year. And while other businesses were consolidating, MotorCycle Holdings was able to expand our product offering, increase sales and continue implementing and delivering on planned growth opportunities, which is a real credit to our team. We employ more than 700 staff nationally, and I'd like to express the Board's appreciation for their continuing contribution in delivering this strong performance in a very challenging year. With significant upheavals to many of our operations, our staff demonstrated resilience and their ongoing commitment to a high level of customer service. I also want to acknowledge and thank my follow directors with their contributions throughout the year: Warren Bee, Richard -- Rick Dennis, Peter Henley, Rob Cassen, and of course, our Managing Director, David Ahmet. Finally, to our shareholders, thank you for your ongoing loyal support of the business. We remain strongly committed to meeting our responsibilities to you, our investors. I'd like now to invite David Ahmet to provide an update on the operational performance of the company for the past year, trading for the first quarter of this financial year as well as the outlook for the future for the company.

Thank you, David. Good morning, shareholders, and welcome to the MotorCycle Holdings' AGM. This morning, I'd like to talk about our performance in the financial year 2020, the initiatives taken to improve our results, how the COVID-19 virus impacted our business and the measures that we took to protect the business. I'll touch on the acquisitions that were executed during the year and will run through other initiatives taken to expand the business. I'll provide an update on how we have performed this financial year so far and touch how -- and touch on how the motorcycle market has changed since COVID. I'll explain why we remain optimistic for the future, given that we're in a period of volatility and new challenges. For most of the 2020 financial year, the motorcycle market was flat, which was to be expected based on the previous few years of the market. We were very conscious of the need to improve operational performance in order to achieve improved results over the previous year. We went into the year with a clear investment plan to reduce operating expenses and to expand our footprint, and we made strong progress in both of these areas. There were significant savings made in our dealerships in the first half, and 2 acquisitions were completed in November 2019. In the second half, our focus turned to our wholesale/distribution business, Cassons. Again, significant savings were made in Cassons, and we went into the COVID-19 crisis in great shape. MotorCycle Holdings has retained its position as the market leader in motorcycle retail in Australia. And in fact, we grew our market share to 11.1%, up from 10.6% the previous year. After initial concerns around the impact of the virus in March and April, we've experienced a surge in demand since May of this year. As mentioned, we purchased 2 additional dealerships during the year: Northside Harley-Davidson in Melbourne; and Canberra Motorcycle Centre in Canberra. This took our group to 41 retail sites with 39 being franchise dealerships and 9 incorporating our MCAS accessory mega stores. Despite the challenges and initial concerns around COVID, we continue to expand our product offering by adding additional brands to our existing dealerships. We also continued to grow sales in our wholesale business, Cassons, and importantly, reduced operating expenses. We did achieve some strong results during the course of the year. We went into this financial year, the end of 2020, well positioned to take advantage of the improved trading conditions. Overheads had been significantly reduced. Sales were increasing, and our margins continue to improve. We added 2 new dealerships, and we added 10 new franchises to existing businesses. The increased product offering was only activated towards the end of the financial year. So we didn't receive much benefit from the new additions in the results. As our Chairman mentioned, we were able to increase our underlying EBITDA by 53% for the year to $27.6 million. Net profit after tax increased 81% to $15.2 million, excluding the wholesale impairment. And by June 30, we've improved our cash on hand by $30.3 million to $39.5 million. Our strong cash position at June 30 meant that we could retire $20 million worth of corporate debt in August, pay out interest-bearing bikes to eliminate floorplan costs, pay a special dividend and put aside $10 million in cash for any stock increases. We've continued to trade strongly into this financial year's first half and have maintained a very strong cash position. New motorcycle sales for Australia. So that's the industry on the graph on the left, and that show -- it's reversed the trend over the last 4 years, and we've posted -- the industry has posted an 11% gain for the year. MotorCycle Holdings' new motorcycle unit sales increased by 16% for the same period. If you look closely at the graph on the left, you'll see that the fact the industry was down after the first half. So all of the gain was in the second half of the year, and almost all of that was in May and June. If you look at the first half results over the previous 4 years, you'll see that new bike sales fall every year right up until December 2019. By contrast, MotorCycle Holdings posted a gain in new bike volume each year over the same period. While the market contracted 24.2% over that time, MotorCycle Holdings increased volume by 6%. In the most recent period, being the second half of 2020, the industry put on an extra 20% in sales, while MotorCycle Holdings grew by 35%. This graph is used motorcycle sales for MotorCycle Holdings. This graph highlights our focus on used bikes. The past 5 years has seen compound growth of 10% per annum. It's this focus that sets us apart from most dealers and what has helped us to achieve excellent results this year. We went into the COVID crisis with 2,000 used bikes in stock, the most that we've ever had. Since then, values have increased due to strong demand and margins that were already improving grew even more. Last year, for every 100 new bikes sold, we sold 91 used bikes. And the year before, the figure was 96. The immediate challenge with used bikes is the acute shortage of available stock. And while this is restricting volume, volume growth has been very good for our margins. This graph talks to our diversified revenue streams. It's important to note that it only represents the growth in sales and gross in gross profit. It doesn't represent the proportion of each department. It indicates where we saw the biggest gains during the year. New and used bikes have obviously seen the biggest gains in gross. So far, all divisions -- so far this year, all divisions have had considerable increases in gross, except for finance and insurance. Finance revenue remains flat as we struggle to maintain previous penetration rates. However, all other areas posted large gains since July this year, with wholesale accessories and new bikes, nothing short of outstanding. We grew with our dealerships last year. Part of the growth in new motorcycle sales was driven by our recent dealership acquisitions. The 2 new dealerships are on track to return investment capital in under 2 years. Both will make a considerable contribution to the group's profit this year, even with one of them being closed for 3 months in Melbourne and having to be relocated directly before that. We took upon a program of expanding our product range in the second half of the financial year. The 2020 financial year didn't receive the full benefit of the substantial increase in franchises obtained as those agreements didn't commence until very late in the year. Six new Indian franchises were granted to MotorCycle Holdings just before COVID-19 virus was taken hold in Australia. There was little time or opportunity to launch a new brand, but we started retailing the brand in most locations by May and June. Indian Motorcycles, owned by Polaris Industries, are a tremendous company. They've been great to work with, and we believe the partnership will help drive our profitability this year. Further to that, on June 30, we entered into an agreement with Polaris to establish 2 new Polaris dealerships in Western Sydney. And again, these will go into existing locations. Also, in addition, Yamaha wave runners and Stihl power products have been added to the Cairns dealership in September 2020. Stihl is a world-class industry-leading German manufacturer of chainsaws and power equipment. CFMOTO products, a well-established manufacturer of high-quality all-terrain vehicles from Taiwan, were added to the Ipswich dealership in Queensland. We've also added 2 Royal Enfield Motorcycle dealerships and Benelli Motorcycles to 2 dealerships towards the end of the financial year. Both are relatively low-volume brands, but they do expand our range of entry-level motorcycles. Collectively, all of these new additions to our business are helping us to grow sales, which will help to offset any potential slowdown in the broader market in the second half. The expansion of our product range now includes 16 of the top-selling global brands in the world. And they are helping to generate increased sales and expand our range of entry-level motorcycles, which will help generate future business. Wholesale growth. As I touched on earlier, Cassons maintained profitability despite the market. And while there was pressure on margins, this business performed -- the performance improved strongly in the second half with external sales up 7% for the year. There was a reduction in margin, which was due to adverse exchange rates and old stock clearance. Whilst good progress was made in reducing operating expenses and excess accessory stock throughout the year, we have decided to book a noncash stock obsolescence charge of $591,000 against excess inventory. We also reduced Cassons' stock by $2.7 million over the year, and the wholesale business continued to trade strongly during the COVID-19 pandemic. I'll talk now about our current trading this financial year-to-date. Looking at trading since July this year, industry-wide units increased 31% in the first quarter with road bike sales up 30% despite being flat last year. Used bike demand continues to be very strong, however, there is limited stock availability. While the limited supply of stock is having an impact on sales, we are seeing increased margins on both new and used bikes as a result. Cassons' sales also increased 25% for the same period. And their retail accessories increased a similar amount, except for our dealerships in Victoria. Importantly, our overheads remain tightly controlled, although commissions have increased due to higher profits. In addition to this, our joint venture with the Motorcycle Finance Company is performing well and is right on budget so far this financial year. I'll touch on our -- on Victorian experience. It will come as no surprise to learn that our Victorian operations were the most heavily impacted by COVID-19 pandemic and associated lockdowns. Six of our Victorian stores were unable to open during the lockdowns, although we did continue sales by phone and online. Initially, we forecast potential losses of our normal monthly sales of $6 million and $9 million over a 6-week period. But sales were maintained at 50% of normal trading. Now the stores are reopening, we expect to see pent-up demand translate into increased sales. In relation to JobKeeper, the payments have reduced potential lost revenue in Victoria, and MotorCycle Holdings is now ineligible for any future payments. Our focus for this year. Looking forward to the remainder of the '21 financial year, our focus will be to continue to improve our cost structure, improve margins and maintain reduced overheads. We'll be focused on improving the efficiency of new dealerships and showrooms and improve the performance of all of our leaderships. We're planning on lower CapEx requirements for the year as the majority of our dealership refurbishments have been completed, and no major acquisitions are planned at this stage. The product expansion will continue through the strategic acquisition of additional product including refreshing the wholesale distribution division through the addition of new brands and suppliers and by leveraging the expanded customer base achieved this year. The goal here is to continue expanding our product range and increasing revenue without increasing our cost base. In relation to plans for future acquisitions, the current buoyant industry conditions limit dealership acquisition opportunities, so we will continue to take a prudent approach to dealership acquisitions opportunities in 2021. 2021 outlook. We are cautiously optimistic about the forthcoming year due to the renewed interest in motorcycles as a great leisure product, and we believe our expanded product range is offering to help underpin the current sales momentum. We do expect the domestic interest and demand in motorcycles that has ramped up since COVID to continue. Although should there be future shutdowns driven by COVID-19, the current heightened sales demand momentum could be expected to slow. The supply shortages across all new bike brands remain a challenge for the business. However, we are confident that with the strength in the forward orders, the current volume is sustainable. Slow or delayed supply remains the biggest threat to volume. In terms of financial results for the first half '21, we expect underlying EBITDA to be in the range of between $23 million and $25 million. Our eligibility for JobKeeper ended in September. But those payments will offset with $6 million -- but those payments will offset wages of $6 million in the first half. The short-term stock shortages are ongoing, but margins are increasing as stock becomes harder to acquire. In closing, I'd like to say we have every confidence that the strength of the company's growth strategy implemented over the past 3 years has provided us with an excellent platform to take advantage of both the current improved trading conditions as well as opportunities for future growth as they arise. I'd now like to hand you over to our Company Secretary, who will field any questions. Do we have any questions?

We don't have any questions that have come in just yet.

All right. Let's give a few seconds for everyone. Maybe there's plenty of opportunity for questions a little bit later anyway. All right. Given that there's no questions, but as I said, there is time for questions later, should some come up. But before moving on to the formal business of the meeting, I will go over today's voting procedures. On a poll, each member voting through the portal in person or their proxy, attorney or corporate representative has 1 vote for each security held. Only 1 vote is allowed per joint holding. If more than 1 joint holder tenders the vote, the vote of the member name first in the register will be accepted to the exclusion of the others. If a proxy has been directed to vote in a particular manner, if the proxy is entitled to vote, he or she must vote in accordance with the direction. For some items of business, certain votes will be disregarded as explained in the voting exclusion statements in the Notice of Meeting. I propose to take each resolution in the sequence it is listed in the Notice of Meeting that was taken as read at the beginning of today's meeting. As confirmed in the Notice of Meeting, as Chair of the meeting, I intend to vote on each resolution I am entitled to consistent with the recommendation of the Board, which are in favor of all resolutions. Whereas Chair, I have been appointed as a proxy that is undirected, I will be voting undirected proxies in favor of resolutions, consistent with the Board's recommendations. You may submit your votes at any time. I will give you a warning before I move to close the voting. I'll now move on to the formal business of the meeting as set out in the Notice of Meeting. The first item of business is to consider the financial reports, the directors' report and the auditor's report. These reports are contained in the 2020 annual report. The Corporation Act requires that these reports be laid before the meeting and are available to view on the meeting homepage. There is no requirement that shareholders vote on, approve or adopt the financial reports. However, the Board takes the view that shareholders should be afforded an opportunity to put questions regarding the financial reports or other matters relevant to the performance of the company. Shareholders are entitled to direct audit-related questions to the auditor, Simon Crane from KPMG. I do note that no written questions to the auditor were submitted prior to the meeting. I now invite questions from shareholders in relation to the financial reports or the audit. Nicole, are there any questions?

There's no questions in relation to the financial statements and reports.

Thank you, Nicole. Ladies and gentlemen, as consideration of the financial reports has been completed, I will move on to the formal resolutions to be considered by the meeting. The first resolution to be considered is to present shareholders with the opportunity to participate in a nonbinding advisory vote for the adoption of the remuneration report for 2020 financial year. The remuneration report is part of the director's report, which is contained in the 2020 annual report. The Corporations Act requires the remuneration report to be submitted to shareholders for consideration. Due to the timing of approval by the Board of key management personnel's short-term incentive bonuses for the 2020 period, which occurred after the date of signing of the annual report, the bonuses were incorrectly described in the director's report released on the 27th of August 2020. The report described the short-term incentives as the short-term financial and nonfinancial performance measures established by the Board at the commencement of the financial year were not achieved, and the Board did not award a short-term incentive payment to participants in the short-term incentive plan. The paragraph should have read, the short-term financial and nonfinancial performance measures established by the Board at the commencement of the financial year were achieved, but the Board has not yet awarded a short-term incentive payment to the participants in the short-term incentive plan. There is no impact on the numeric tables in the director's report, and there is no change to the reported consolidated statement of profit and loss. For clarity, short-term incentive payments were awarded to participants in recognition of the achievement of financial performance measures in a very difficult year. Government support in the form of the JobKeeper program were excluded from these evaluations. The company's remuneration policy and practices are designed to attract, motivate and retain high-quality people. They are built around the principle of being competitive in the markets in which we -- the company operates, and the company unanimously support the adoption of the report. Are there any questions on the remuneration report, Nicole?

We've received no questions in regard to the remuneration report.

All right. Thank you, Nicole. The screen shows details of the proxies received on this resolution. As there is no further discussion, I'll now move on to the next item of business. The second item of business is the reelection of Peter Henley to the Board of Directors. Peter was appointed as a director by the Board on the first of March 2017 and was last elected by shareholders at the 2017 Annual General Meeting. In accordance with the company's constitution, Peter retires at the end of the Annual General meeting, and being eligible presents himself for reelection by shareholders. Nicole, are there any questions in relation to the reelection of Peter as a director?

No. I have not received any questions.

Thanks, Nicole. The screen shows details of the proxies received on this resolution. And as there is no further discussion, I now move on to the next item of business. The third item of business is the reelection of Rob Cassen to the Board of Directors. Rob was appointed as a director by the Board on 31st of October 2017 and was last elected by the shareholders at the 2017 Annual General Meeting. In accordance with the company's constitution, Rob retires at the end of Annual General Meeting, and being eligible presents himself for reelection by shareholders. Nicole, are there any questions relating to the reelection of Rob as a director?

No. I've not received any questions in relation to the reelection of Rob as a director.

Thanks, Nicole. The screen shows details of the proxies received on this resolution. And as there is no further discussion, I'll now move on to the next item of the business. But I would like to congratulate Peter and Rob on their reelection. The fourth item of business is the approval of the company's long-term incentive plan. The long-term incentive plan was previously approved by shareholders at the company's 2017 Annual General Meeting. The Board recognizes the need to adequately incentivize and remunerate staff, and believes that an appropriately designed long-term incentive plan aligns employees' interest with that of shareholders. Nicole, have we received any questions in relation to the long-term incentive plan?

No. There are no questions with regard to the long-term incentive plan.

Thanks, Nicole. The screen shows details of the proxies received on this resolution. And as there is no further discussion, I'll now move on to the next item of business. The fifth item of the business is the approval of potential termination benefits under the long-term incentive plan as set out in the Notice of Meeting sent to shareholders on the 26th of October 2020. Nicole, have we received any questions in relation to this resolution?