Considering how much I love all things two wheels, it was a bit shocking to see a recent press release come across my newsfeed whereby Pierer Mobility (parent to KTM) announced they were pulling 2024 guidance. For those who don’t follow financial markets, when a company cancels guidance and basically says “we don’t know what is going to happen” its almost always very bad. This got me curious and gave way to spending a few hours analyzing the companies most recent earnings releases and presentations. I posted my findings on a popular dirt bike forum, but in the spirit of trying to capture more on my blog, here is the post in its raw and unedited form.
As posted here (VitalMX)
…Its cool to see so many people interested in the business and equities side of the two-wheeled industry. Few thoughts if anyone cares…
First, knowing the product or sport is often very different than knowing the business and underlying economic drivers. Everyone on Vital knows the sport incredibly well, but probably hasn’t spent a ton of time studying equity markets, debt markets and how monetary policy plays into all of this. (and why should you!? Its boring) The reason I mention this is its probably best to take this from a perspective of “learning” than a perspective of “knowing”. I say this as a person who has spent over a decade around finance, equity markets and technology…and I can’t make any snap judgement looking at one KPI or earnings report. You have to be willing to take some time to peel the proverbial onion. This is especially the case in the European companies where there is a lot more nuance, opaqueness, currency conversion, and overall strangeness not found in US companies.
Those interested in the underlying health of the business and what challenges lay in front of them, this part is for you. If I were to jump in and consult directly for the company, here is what I’d be recommending.
Revenue, Debt and Cash Flow Crisis: The company has three major concerns right now. First, revenue is falling and debt levels have doubled to EUR 1.469B as cash flow has turned starkly negative at (EUR615M). Digging into this a little deeper, it looks like capex is responsible for 1/3 of this whereas operations is responsible for the other 2/3s. Worth noting, I cannot find what the terms were on the new debt the company took on, but I’m sure its not great (8%+).
On the demand side of things, we’ve seen a huge taper off from COVID to now. This is made worse by higher interest rates, especially when it comes to more expensive purchases and discretionary spending.
Recommendations: If I were CFO, which I honestly feel I could be considering how asleep at the wheel their current CFO has been, here is what I’d do. I recognize this is coming from an American who doesn’t have to deal with the same labor laws and regulatory environment as someone has to deal with in Europe. This is not in hierarchal order.
1) Cut capex to minimum levels. Invest in the bare minimum until you right the ship from a cashflow perspective.
2) Layoffs I know this sucks, but cost control is everything, especially as demand is in the toilet.
3) Dealer sell through You know what sucks more than selling a bike for no profit? Selling it years later for negative profit. KTM has to take their medicine and figure out ways to sell bikes that are on dealer floors. One way I’d do this, considering consumer credit is expensive, is by getting super creative with financing. For instance, I’d look to partner with a bank and subsidize rates for end buyers even on something like a dirt bike which I know aren’t historically financed. Obviously, I’d also be looking to offer deep discounts on showroom inventory, etc. You have to get these old bikes off the books or the logjam gets worse.
4) Stop the GasGas/Husky/KTM craziness We’re not stupid. They are the same bike with different plastics and slight changes to this or that. Its costing the company more in brand management and supply chain management than they are actually making on this ruse. It might have worked for a year or two while everyone figures out whats what, but ultimately, they need to consolidate the offerings and make this simple for everyone. You all can complain about colors, but if I’m the CFO, I’d wager the 23% of sales that are GasGas and Husky will be reabsorbed as KTM, which is already 74% of all moto sales for the company anyway.
5) Divest Felt KTM has no business owning a crappy bike company. Sell the company and take this cash to finance future operations.
6) Clean up the e-bike stuff or sell it off. They did EUR69M in sales across all bicycle products in the first half of 2024. They are ascribing EUR300M in debt to that unit. That dog don’t hunt. Their EBITDA is (EUR115M) which is abysmal. I know mtn bikes/e bikes well and there is literally nothing special about their offerings in an already crowded space (except maybe their dealer network?). They need to get rid of excess inventory at whatever price they can (reasonably), spin the unit off/sell it/whatever. Right now, its a big net negative for the company.
7) Cut race teams We all love racing and the sport as a whole, and I’m not suggesting you cut this entirely, but you need to cut back the racing stuff to the absolute minimum to get something out of it. Bummer, but this is just the way it is right now.
8) Amortize costs across a longer period of time This one will be unpopular but I’d look to delay any new product announcements (that are really material) until we’ve really sold through out stuff and appropriately amortized costs of that generation model against the market. There is no reason to introduce something new when the current stuff is selling through well and the brand is doing well from a competitiveness standpoint. This is a slippery slope, obviously, and the one area I’d be least looking to “press” but if the brand isn’t careful here they could put themselves out of business.
What does all this mean for you and me? It probably means we’re going to see KTMs for a lot less money at dealers for at least the next 6-12 months. While I don’t see bankruptcy on the horizon just yet, I do see some serious challenges for KTM as a company. I also would not be an investor in the stock, but I sure as hell would be looking to buy a bike soon.
Oh, and for those wondering, no, even if there was someone super wealthy lurking in the wings here, you aren’t going to be able to buy the company in some sort of hostile takeover. That said, if someone did buy a 5% stake, they’d likely listen (maybe) to what he/she had to say.
Finally – I’m looking for work KTM. Happy to come help. I don’t bite.
For more reading:
- Company Presentation (October 2024)
- H1 Results (August 2024)
- IR Page
Following a slew of news and updates, including the company actually declaring European chpt 11, I added an update on the vitalmtb forum which you can find here