MotorCycle Holdings Limited (MTO) Earnings Call Transcript & Summary

Thank you all for standing by, and welcome to the MotorCycle Holdings Half Year Results. [Operator Instructions] I'd now like to hand the conference over to Managing Director, David Ahmet. Thank you. Please go ahead.

Thank you. Good morning, everyone. My name is David Ahmet, and it's my pleasure to bring you MotorCycle Holdings half year results. Today, I'll explain our financial results and drill down into the operational performance of the various segments within our business. I'll touch on the highlights and explain what challenges came our way. Then we'd like to report on where the business is currently, and what the outlook looks like for the second half. We came into the half trading well and feeling very optimistic about the future. Almost immediately, the challenges that COVID-19 brings threw a large portion of our business into lockdown. MotorCycle Holdings has 16 of its 40 dealerships in Sydney, Melbourne and Canberra, along with our wholesale distribution business, Cassons. Most of these dealerships were in local government hotspots and was subject to the strictest trading restrictions. Not only were we forced to keep the doors closed, it was difficult for our staff to even travel to work. There is no doubt that our retail sales were negatively affected, especially in the western suburbs of Sydney. Our wholesale business at Eastern Creek was also in a hotspot area and struggled to maintain staff levels, as the virus took hold in Sydney. However, our staff responded well, and we made the best of the difficult conditions. We adapted to the changed conditions and found our way to keep the business going. So there's no doubt that the first 4 months of the half were -- the results were subdued. Lockdown free Queensland performed well, and as a Group, we achieved better results than I expected. A very strong end to the half helped pull back some of the shortfall of the earlier months. A few of the highlights of the half were, revenue for the Group was up 9% to $237 million. Gross profit increased 3% to $66.6 million, and we maintained a gross profit margin of 28.1%. Underlying EBITDA decreased 6% to $19.8 million, and net profit after tax decreased 27% to $12.6 million. I wouldn't normally refer to a decrease in profit as a highlight, but when you consider that the previous year was aided by $5.8 million worth of JobKeeper, and this year had no assistance, and the fact that lockdowns were much more restricting this year, I'm actually quite happy with the results. So I must say, that we've increased our dividend for the half to $0.12 per share. Now I'd like to explain some of the key points that led to the result. Importantly, demand remained strong across the whole business. New motorcycle unit sales were up 14% despite the lockdowns against the market increase of 21%. We worked hard to increase our used bike inventory, which resulted in a 14% increase in unit sales against the flat market. Retail accessory growth was down 10%, as they were impacted negatively by the lockdowns, especially in Western Sydney, where we have our largest accessory super stores. However, they rebounded very strongly when the lockdowns were lifted. Overall expenses increased 7% for the half, which is in line with our sales revenue. Some of that increase came about from increased marketing and development in our better e-commerce platform. There's also an increase with the acquisition of increasing costs with the acquisition of a new business in New Zealand. Costs of $400,000 from the fire that we had last year, which was repaid by insurance and an increase of rent of $500,000 due to AASB 16 accounting, which was not affected in our actual lease payments. I'll drill down a little further on these numbers. As mentioned, we had an increase in sales of 9%, but growth was only up by 3%, due to a decrease in gross margin. The decrease in margin was not due to margin degradation, but more so representative of the change in mix of sales. Our lowest margin products come from new and used bikes, which had a reasonably large increase in sales, whereas parts and accessories, which retain a much larger margin had a decrease in sales. Overall, our margins across the Group remained strong and consistent with last year. Overall, the EBITDA result of $19.8 million was down $1.2 million than last year, if we disregard the JobKeeper assistance of $5.8 million received the previous year. Given the severity of the lockdowns, I was quite happy with this result. I'm comfortable with the balance sheet. We currently have $10 million bank line and $5 million in cash and paid $4.7 million for the New Zealand Wholesale business. Importantly, we've been able to improve our inventory levels, which had been depleted during COVID. Current levels are adequate to run and grow the business going forward and should only increase as we add additional new product lines. We're comfortable with the $0.12 per share dividend, as it falls into our guidelines of paying out 50% to 70% of profit. Over the last 12 months, we've tried hard to improve our value and return to our shareholders. Our share price has increased by 22% over 12 months, and our dividend has increased to a 6.2% fully franked yield. Now our intention to grow the business to assist -- we intend to grow the business to assist with unlocking further value. In the 5 years since we listed, we have grown the business every year and currently turn over twice what we did 5 years ago. This goes for NPAT as well, which is more than double that of 5 years ago. We've increased our sales each year, with new motorcycles despite the industry declining for 3 of the last 6 years. Our increased stock position with used bikes has returned their sales to better than pre-COVID numbers, in a market where supply has been severely restricted. The various profit drivers of the business remain very consistent in the half, with the exception of retail accessories. Overall, the Group performed well over the half despite the COVID restrictions. New and used bike sales and demand remains strong. Retail accessories rebounded strongly, since reopening. All dealerships are performing well. However, some of the newer dealerships can perform better with time. We're keen to grow the business both organically and via acquisition. Further to that, as mentioned, we completed the acquisition of Forbes and Davies in New Zealand. This is another wholesale distribution business, and we have a clear and definite plan to grow that business. Sorry, I just lost my page, give me a second, I will find a new page. Just stay on the line, I am not quite finished. Okay. So back to our position in organic growth. We have also, earlier this month, completed the acquisition of the dealership in the flood capital of Queensland, [ jumpy ]. In the first month of ownership, we have endured 2 significant floods, of what have been motorcycles. However, I'm happy to say that dealership is high and dry, and not being adversely affected. In fact, the large rainfall should only help our already very strong mower sales. Wide Bay motorcycles fall into the rural category of dealerships and helps to provide further diversification. The sales in agricultural 4-wheelers and lawnmowers is particularly strong. Both Forbes and Wide Bay motorcycles are profitable and will contribute to this year's earnings. Next, I'd like to provide an update on Cassons, our wholesale business. COVID-19 also has had a negative impact on the business and the sales decreased by 7% for the half. However, gross profit was maintained, as gross margins improved. The importation of accessions has been disrupted, and we are still experiencing delays with shipments. However, we've been able to finally rebuild our stock position and are well positioned to take advantage of the continued strong demand. We've been able to maintain the low cost base achieved in the previous financial year. Our joint venture finance company continues to grow strongly and has posted a net profit after tax of $624,000, a 52% increase over the previous year. We still maintain a special provision for COVID losses with the finance company. However, losses have trended down since April of last year and are well within expectations. The responsible lending combined with disciplined debt collection have assisted with keeping losses to a minimum. Our focus for the next half is to maintain our strong margins, maintain or managing inflation and pressures on our overheads, whilst looking for ways to grow the business. We will continue to add to our product offerings by adding 2 mower brands to existing dealerships. We believe ride-on-mowers to be the right product to assist with further diversification and additional growth. We have had very positive discussions with mower manufacturers about expanding our involvement in the mower industry. We remain motivated to acquire additional motorcycle dealerships and continue to review opportunities. We are set to release our new business-to-business e-commerce platform this half, followed by an enhanced e-commerce retail platform. Outlook-wise, finally, we go forward, we are looking confident that the business will perform well for the rest of the year, notwithstanding any unexpected COVID phases. Whilst January was also constrained somewhat due to the spread of the Omicron variant, February has returned to strong results. Supply of motorcycles and accessories continues to be volatile. However, supply is sufficient to deliver growth. Traditionally, the second half of the year is not as strong as the first. However, in recent years, that has been disrupted, adjudicated. Our intention is to continue with our dividend policy of paying out 50% to 70% of NPAT. That's all I've got now, and I'm happy to take any questions.

[Operator Instructions] Our first question comes from Sarah Mann at Moelis.

I had a question just on the floods in Queensland. I hope you guys are okay. With the flooding, have you had any impact to inventory like -- or stock losses or anything like that? And if so, how does that kind of impact revenue in second half, given that we're already still kind of in an inventory kind of constrained environment the dealership [indiscernible]?

Very difficult question to answer this morning, given that it's only just happened yesterday. So we have had water into 3 dealerships. Two of those dealerships, we were able to remove a lot of inventory over the weekend. So we removed all the Harleys and BMWs out of 2 dealerships, and moved a lot of the accessory parts stock to an elevated position. So very minimal inventory loss in those 2 dealerships. However, in the third one, we couldn't get there in time and it is being flooded. The extent of the inventory loss there, I don't know, we are, of course, fully insured. So we don't think -- well, if you look at sales for the half to some degree in that one dealership, it is insured. We don't expect it to be material, as far as the EBITDA for the growth for the half. But there's a bit of work here to do yet. But 2 dealerships were certainly underwater this morning, and we removed the stock. So that was where the biggest exposure was, with the Harley and BMWs, and we removed all of that stock basically, working around the clock for the last 2 days. So I don't know to the extent of the claim -- don't know the extent of the impact to sales at this stage. But I don't believe it will be material. There will be an effect, but confident that we'll be back in trading within a day or 2 at Morgan & Wacker and we'll give it a week, I would think, probably. So there's probably a week -- 2 dealerships, a loss of revenue and a weekend on market dealership. So overall, not too bad. The rest of the dealerships are all open. Gold Coast is still unfolding. So we don't know exactly, so far no one has had water in the business at Gold Coast, but that's possible later today, perhaps given the new dealership there didn't have any water in the building. So it's had 2 floods during the course of February, but still trading very well. So -- but yes, unfortunately, I think will bounce back pretty quickly. We've done this before obviously. We know exactly what to do. We're quite familiar with dealing with the floods in Queensland.

Yes. Got it. All right. And then in terms of the FX movements and also cost inflation, how much of that are you able to pass through, and what other things can you do to kind of try and mitigate some of the cost inflation impact on your margin?

So we've been passing on increase in costs so far, both on bikes and accessories. So we're still maintaining a good margin at a retail level that hasn't been degraded at all. Wholesale margin is still holding up quite well. It's strong. It's as strong as it has been. FX, we have -- we've had some money out for about 6 months. So we've been trading on a relatively strong Australian dollar. That might come off a little bit, I think, in the next 6 months, but not significant. It will only affect Cassons, the wholesale business there. But of course, we're looking to increase our prices across the board with Cassons as well. We've done that several times over the last couple of years, and we're doing that again now. So we think we can maintain the margins, without any great impact to gross profit.

Okay. Great. And then just looking at industry bike sales. So clearly, they were really strong last year.

Particularly off road.

Yes, particularly off road. But I mean even stronger than, I don't know, when you look at when COVID [indiscernible] government stimulus. But, do you think bike sales are kind of at a peak level right now versus stock? Or maybe there's been a kind of a structural shift in like -- the cycle kind of changed now and the demand for bikes is just structurally larger?

It certainly appears to be the way. That's the way everybody is talking or thinking, when I speak to manufacturers. There's no one really factoring a decrease in anytime soon. We're still struggling to get stock. So it's good to be able to increase sales on last year, which we are well up, obviously, and so we're well up again. So we are able to supply a reasonable number of bikes. But having said that, we can only supply bikes to people that pay a deposit and a contract ahead. So we don't have a lot of floor stock. So we're always waiting for bikes to arrive. So we have some room for profitability, but the demand seems to be really quite strong, particularly offroad bikes are being now really, really strong. And it's across the board, to which road bikes to use, to a certain degree. Used is still strong. Supply has been the problem with used bikes. That has been the real issue. So we put a lot of effort into acquiring used bikes over the last 6 to 12 months, and that's paying dividends without a doubt, as well outperforming the market more considerably. So I don't -- I think it's here to stay. I think the demand, is that people just want to buy motorcycles. But it feels very strong, very reliable and very consistent still.

Our next question comes from William Cunning at Carter Securities.

I just got a couple of questions. Just firstly, it's already been alluded to on the call, last year was a very strong year for bike sales, particularly that uplift in Q4. I was just wondering, can you provide maybe a bit more color just on the type of demand and the type of customer you're seeing? And also to the extent that how much like repeat business have you seen, and how many people are operating from entry-level bikes, how many people are coming back to the store after maybe purchasing in 2020?

Yes. There's still plenty of new people coming into the industry. I mean we've always got repeat business for Learner Approved customers who want to upgrade after 2 years. But that's not particularly a massive value increase. It seems to be new people coming into the motorcycle industry, particularly with offroad bikes. So if we look at what's selling really well in that area, is the kids bikes, mini bikes, dirt bikes for recreational use. So it's really very much -- feels like new customers are not that repeat business yet. It usually takes a couple of years for the repeat business to kick off. We wouldn't normally see a customer back within 2 years if they wanted to upgrade. So we're yet to see any sort of kick in repeat business from increased COVID sales. But no, I think it's just new people wanting to ride motorcycles, and that's really quite encouraging.

Yes. Okay. Great. That one's positive. The other question I had was just on staffing. Obviously, that's the sort of the theme for a lot of businesses at the moment. Are you seeing enough -- are you getting enough ability to get staff at the moment?

Yes, that's been a challenge. There's no doubt about it. And I think every business is struggling a bit. We're seeing some wage pressure. There's no doubt that people are looking for more money. But if we look at the last half, our wages were only up $900,000 for the half, which is not too bad, given that we've driven sales higher at the same time. I think our wages were up 3%, and their sales were up 9%. So far, we've been able to contain wage growth. It's certainly not out of hand. And it was pretty low in the previous year, too. So we're coming from a low base we've maintained a fairly low wage base. So I'm happy with what it's costing us. It is a struggle to get good people, but we find them -- we continue to find them. I wouldn't say it's desperation stuff or anything like that, feels relatively normal. But yes, there's a few people moving around and some people leaving and some people coming. But so far, it's all quite manageable.

Yes. That's great. Then my only final question is just around maybe a bit more color on the acquisition pipeline. We've sort of had this -- or it feels like we've had this delayed -- delay of 2 years or so on behalf of vendors, who maybe are capitalizing on the strong market. Could you maybe just provide a bit more color on what you're seeing in the pipeline and maybe people's appetite to sell?

Yes. I'm seeing a fewer dealerships for sale now, than I did, say a year or 2 ago, when they first got their [ interesting ] results. Having said that, I'm reviewing several dealerships at the moment. I've always got something that I'm looking at investigating. Look, that's quite the same vendor interest I would have had, say, 2 years ago, that they're out there and we're looking further afield now too. We've got a bit of interest in this mower -- ride-on-mower market, which is much more significant than we first realized, and it looks like it can be a real growth center for us, a good diversification. So we're looking in 2 directions, on motorcycle dealerships and/or large mower businesses. So we will be looking to add product, add brands to existing sites and even acquiring a [indiscernible], if we saw fit, down the track. We always look to do 1 or 2 acquisitions a year. We've got 2 so far this year. I feel confident that it will be at least 2 next year. I don't think there's been anything completed before June 30. But certainly, we'd be looking to acquire more dealerships over the next financial year.

[Operator Instructions] Our next question comes from Jared Gelsomino at Morgans.

David, just one quick question on sort of the used bike mining dynamic. So I think you sort of called out the stock levels have been maintained, but it does look a little softer than usual. Is that more a function of just to sort of get your hands on the new bikes and maybe pay a little bit more? Can you maybe just speak to that dynamic going forward in the second half?

Well, used bike sales has been quite strong over the last half, up 14% on last year, which we [indiscernible]. But the numbers are starting to look quite healthy there, and we're maintaining the strong margins that we've had the whole time. So it's really quite profitable for us. The difficult part has been acquiring the stock previously. But we've been able to build it up to a fairly good stock there. We're close to $16 million in used bikes now. So that's about right for the size of the effort. There's been a real shift towards new bikes, there's no doubt about that. That part of the industry seems to be growing stronger than used. But I think supply was really the challenge for us. If we look back to why our sales have dipped last year, which is really the only time I've ever seen used bike sales dip in probably decades, and really was that, all the used bikes got snapped up rather very quickly and there are far fewer motorcycles on the market. So that's improved a little bit, but it's still not back to pre-COVID sort of numbers available. What we've done is, increased our human resource capacity to buy them. So we've put more effort into buying used bikes, and buying them further afield, to keep our stock levels elevated. So I guess we're grabbing market share with used bikes. But historically, our used bike business is growing every year for a long time, and it's been a major focus for us, it's a good profit center, and it's a fundamental difference between us and a lot of other dealerships.

Okay. David, that makes sense. And in terms of dividend, obviously, a pretty big interim dividend there in the first half. I guess, how do we sort of think about sort of second half? Something consistent, obviously, towards the upper end of that sort from 50% to 70% payout?

Yes, that's right. We expect to maintain within that ratio between 50% to 70%. We think that's definitely achievable. It allows us some money to invest in new dealerships without stretching us, without going into debt. But most of the ride business came along and then [indiscernible] that we would, but we can pay out 50% quite comfortably, and that leaves us some cash available to continue growth. So yes, we're pretty comfortable with that.

Great. That's all for me.

Our next question comes from Bed Rodney at Morgans Financial.

Congratulations on strong results. Just a question with regards to the mower, ride on mower market. Can you just give us like a bit of an industry overview, how many dealers are out there? I guess, it's quite fragmented. Is it similar types of earning multiples you need to pay? Just this year, where that business can kind of grow to and the opportunity over the next say, 5 years?

Yes, sure. It's still early days for us. But certainly, with sort of the dealership, we can see that the ride-on-mowers have been very profitable for that dealership, it have been a real profit contributor. We've noticed that, certainly we put them in some time ago. It [indiscernible] into 2 dealerships as we speak, a couple of different brands. So we're learning a bit more about that industry as we go. I've been looking at various mower dealerships for sale, and there's no doubt that it's a lot of mom and dad business these days, very fragmented, even more so than motorcycles. They don't have the same investment in capital and scale. However, there are some operators that are very professional, and they do have scale and they are making quite a good return for their investment. So we're probably more interested in if we were to buy something like that, it would be the larger end dealerships. I don't believe that they will change ends, or change things recently, and that had the [ makings ] of about $1 million a year. So a good amount of dealership can be considerable. There were lots of them out there, because everyone has got more than about an acre of grass, need a ride on mower. So virtually all homeowners own large acres of land, that could happen, so they can buy with [indiscernible]. So it's actually quite a sizable market. [indiscernible] for getting any exact figures on the total size of the market, that seems to be available. But just looking at the number of shops around in any given area, and have a traveling. I think as long as it rains, mowers do quite well. And I'm really surprised at the sales that we're seeing in some locations. So fragmented, easy to buy small ones, but they don't move the needle materially. So we're looking for a bit more scale there. But I've spoken to a few interested parties, and that there could be something there in the near future.

Our next question comes from Peter Drew at Carter Bar Securities.

Glad to hear that the business isn't too affected. Just one question. Just on the inventory, you boosted the levels, given the supply constraints. Just wondering, is that -- should we sort of think about that as running things pretty rich, and that may back off as things improve, or should we also sort of think about the possibility, that if you do get an opportunity to boost inventory levels even further, you'll take that?

No. I think we're pretty right now. We've got them back to kind of pre-COVID levels, we have got used bikes right up to where we want it to be. So it's not overstocked, not under. We've proven that we're able to buy more than we sell, to get to that sort of stock level. So we know we can turn that tap on if needed. So used is about right. Cassons was the big one, that was down $12 million or $14 million on what it was, and we've increased the stock there by $12 million of Cassons. So we really desperately tried, but replaced of these months and months, prior to receiving the stock. So we placed the dirters last year and before that. And so that stock, and [indiscernible] large orders been and that stock started to flow now. So that's coming in. So those large orders is really helping rebuild our stock position. And of course, we know that their stock is further delayed. So we're curing stock to for longer periods of time now, otherwise, we will run out. So it's a bit of an insurance policy there to try and maintain the sales going forward. We do know that we lost a lot of sales in Cassons, because we couldn't supply, and other businesses are in the same boat, where they had demand for product, that they just couldn't supply. So demand has remained really quite strong. We bought deeply into our really fast-moving stock, and stock that we've been very confident with. So generally came off a little with the Omnicom virus. That was likely even locked down for that month, but we think we've rebounded very quickly back into February. So we're feeling confident that we're back into a normal market. It really was just a 1 month of a variation there. But no, I don't think we need to buy any deeper with Cassons or the retail shops or used bikes. New bikes, we're still waiting on stock all the time, but that kind of comes in and goes out. It doesn't require a lot of cash, as it does on the floor plan. So really, I think we people are right, and I think we can grow the business with the existing stock level, as long as we can get reasonable supply and accessories, similar to what we have had in the past, then we have got enough to grow.

That's quite well done.

[Operator Instructions] Our next question comes from Matthew den Elzen at Scanlon Capital.

I am just looking at the new vehicle sales, which showed new motorcycle sales picture of 14% versus the industry in '21. Face value means, there is a bit of market [indiscernible] loss. Can you -- I can't remember seeing in the past. Can you just talk to why your growth would have been most [indiscernible]?

Yes, sure. There is 2 things that affect that, as far as I am concerned. One is offroad bikes were really strong. That was particularly strong, by far, the growth sector. We are in metropolitan deals, mainly in Sydney, Brisbane, Melbourne, what have you, and we can sell a lot of road bikes than offroad. So we wouldn't have had quite the same benefit from that offroad. The other thing is, Sydney, Brisbane, Melbourne dealerships, were shut, and it was very difficult to sell new bikes for 4 months. So while the country areas could keep selling the offroad bikes, the dirt bikes, provincial towns, where they sell really well, we couldn't kind of enjoy the same sort of growth in sales as we are in a restricted trading. So I think those 2 factors created what was somewhat of an aberration. There is also a third factor, though it's less material, and that is some of the brands that still don't get recorded in those SCI [indiscernible]. So small numbers, and not really significant. But I think mainly we are looking at the factory, road bike market is subdued in the capital cities. And we're not trading much in offroad markets outside of Brisbane, or Sydney or Melbourne. But there is a real issue with supply. It's not quite what it used to be. Previously, because of our size, we could buy a lot of stock on any given model and we could hold that stock and make sure that we had it in the future. Now, manufacturers will only supply units to the dealership, if it's pre-sold and have a contract and deposit. So we can't use your size to control the stock situation like we were in the past. I'm sure we'll get back to that time. But right now, it's very much size is no benefit to us.

Correct. Okay. And then in terms of the order book, if you're taking deposits, is there is a view on what the order book looks like on sort of unfilled orders at the moment versus...

Yes, it's -- I haven't compared recently, and the changes from time to time, from brand to brand, like sometimes a brand will have a lot of stock arrive. And so the order book drops down, and then somebody else's runs out. So it's up and down all the time. But generally speaking, it's about the same as it has been for the previous unit 6 or 12 months. There's a strong order book there. Yamaha in particular, at the moment needs a lot of bikes, a lot of in pre-sold, and we've got 9 Yamaha dealerships, so all the bookings are high, because of that. A lot of bookings are high with Harley Davidson. They're always waiting for Harleys, and [indiscernible] getting the sufficient numbers, but we could sell more. BMW is very tight, you know, we're really looking for stuff with BMW. So trying to find real range for bikes, for most of the brands. So it certainly hasn't -- doesn't look like it's improved. If anything, it might have got worse, than say 6 months ago. But volatility will continue, I think for probably another 12 months. It comes in -- the worldwide demand for motorcycles have gone through the roof. So it's not just us that they have to supply, it's the whole world, and the different manufacturers, they are now getting more bikes into the country, have slightly gone up, because they have [ sold us ] more. But it's still very healthy, that order book.

[Operator Instructions] David, it looks like we have no further questions. So I'll hand back to you if you have any closing comments.

Okay. Would like to thank everybody for their time today. And of course, I'm able to take calls anytime you like. We are in roadshows down in Sydney, Melbourne next week. Thank you.

Thank you very much. This does conclude today's conference call. Thank you all for joining. You may now disconnect