The Orange Falling Knife Part 3

The Orange Falling Knife Part 3

In part 1 of this series, I discussed KTMs financial issues. Part 2 covered KTMs product strategy. For Part 3 I planned to create a hypothetical product strategy for the three brands with more clarity. I wrote it but despite my best effort it was pompous and tone deaf. However, the time spent researching and talking to industry people was fascinating and is sending me in a different direction. This will discuss recent events in more detail and be the beginning of a discussion on where things may go. Hopefully you find it interesting. First, some status updates:

On November 29th Pierer Mobility Group filed to enter the Austrian version of bankruptcy protection to restructure the company. The type of administration PMG applied for is unique and apparently has not been utilized previously. It amounts to a temporary freeze on their situation, postponing outstanding payments but not (yet) renegotiating them. It gives them a 90-day window to prepare plans for reorganization and then submit it to creditors to approve or reject.

Few were surprised at this, but the information contained within the filing was shocking. Previously they had listed their debt obligations at approximately €1.4 billion, but now report it as approximately €3 billion. Note that their 2023 total sales were €2.66 billion with a profit of €160 million. On top of that, it included these bombshells: "In 2025 and 2026, operating performance will therefore fall by around one billion euros". Also "A negative annual result in the very high three-digit million range is also expected for 2024." Let’s say that differently so you get the full effect: Sales will drop about €500 million per year, and they are going to lose almost a billion euros this year.

In Austria the bad press is coming hard and fast. KTM were unable to pay November salaries and are approximately €40 million behind there. Workers will be paid November wages and a Christmas bonus by a government fund but there is some bureaucracy to work through first, which could take up to six weeks. As I understand, the company, not the fund, is intending to pay December wages. The workers have been paid for 1 day of the month of November thus far.

Pain is spreading to suppliers. Austrian news source Salzburger Nachrichten profiled an Austrian manufacturer called RT Group that manufactures plastic parts such as bodywork for KTM. KTM is half their business, they have not been paid and are owed “several million euros” according to the owner. He is already having to reduce hours for his workers and has not yet calculated the effect of KTM being overstocked and not needing more parts for at least two months, probably more.

I was able to speak with two PMG brands dealership owners to get a sense of how it is affecting shops. For starters, new bike sale prices have collapsed below invoice costs. This will vary dependent on model and region, and many will cheer after the price “surges” during COVID. Fine, but understand this will affect the value of used machines, perhaps including the one in your garage.

Dealers typically get a short period, typically 2 months, sometimes more, where they are able to hold inventory without paying for it. This is a common practice known as “flooring”. After that period KTMs finance company begins charging interest on the unpaid balance. Since interest rates have spiked flooring costs are higher. The charge per bike may not seem like much but the monthly total can be. One of my contacts said it is easily possible to have a flooring bill for unsold financed bikes of $10k each month, at a time when sales are slow. He explained that in past downturns some of the Japanese brands have assisted by extending flooring or offering incentives or rebates. The importance of this cannot be overstated, it is a crucial benefit for times like this. He does not think PMG has the capital to do this, and based on experience would not even if they could.

In the motorcycle news sites we frequent Pierer has not received much direct criticism. In fact, they rarely discuss his role at all. That is definitely not the case in the Austrian news, finance, labor, or political communities. Their tone toward him ranges from, ahem, “surprise” at how quickly this happened to suggesting his behavior was irresponsible. Seeing as the Austrian government will have to step in with some heavy financial support (via a government insolvency fund), they are understandably not happy.

Some of his recent actions create terrible optics. In 2020 the company received €11m in government subsidies for COVID – and paid dividends to shareholders of €11.25 million. According to this website Pierer received €7 million himself. They continued to dividends in the last two years, while simultaneously they were walking back forecasts. On top of that, Pierer has recently been working to purchase other companies outside of motorcycling, one of them as recent as this summer! (look here and here and here). It’s not clear to me if this impacted PMGs financial situation but holy smokes, how bad does it look to be spending time buying other businesses at the same time his is failing?

So, what is going to happen?

While researching this article, I spoke with multiple industry people that have experience either inside KTM NA or directly working with KTM NA in a professional capacity.  Each had senior roles on their resumes and years of experience. They were a wealth of knowledge and perspective, with intelligent, reasonable, and insightful thoughts on this situation. None were notably harsh in discussing PMG. They were willing to speak publicly, but because I wanted them to be able to speak more freely, and the motorcycle industry is such a small community, I made the decision to keep them anonymous.

In our discussion, I made a point to ask each of them one specific question: what is your best, most realistic estimation of what will happen?”.  The question would somewhat stall the conversation. I don’t know if there are too many moving parts, or considering the possible consequences caused anxiety, or something else. Whatever the reason, with one exception, all the answers were mostly vague.

Because I have an excess of curiosity, I tried to answer the question as best as I could. Using a whiteboard, I listed the companies’ problems, the involved parties, and some of the possible outcomes.

Few of those scenarios are good. Most have a good amount of pain. Some were downright ugly.

I will try to discuss those in part 4, but for now, his is what we hope will happen: Mr. Pierer comes up with a way to pay off $3b in debt without creditors or vendors taking a haircut, receives another $1b in working capital, retains all the employees, goes back to 2 shifts, keeps all 4 motorcycle brands plus two bicycle brands, remains in MotoGP with full support, clears out 130,000 unsold motorcycles in their warehouses, plus the excess units sitting in dealers, restores those prices to something both acceptable and sustainable, solves their LC8 cam issue, solves their bicycle debacle, settles their TPI lawsuit (didn’t know about that one, did you?), and bounces the stock back up to January 2024 levels. Oh, I forgot, restores industry demand globally.

Got all that?

For the widest perspective, let’s consider an opposite scenario: PMG submits their reorg plan to the creditors, it is denied, the company goes into liquidation, around 5000 employees lose their jobs, many of them suffer financial consequences, debts are defaulted, suppliers are hurt or fail, dealers are hurt or fail, a sizeable hole is blown into the economy of Upper Austria, a sizeable hole is blown into motorcycle racing, a sizeable hole in blown into many parts of the industry, a large number of customers instantly vanish, used machines like yours are worth pennies on the dollar, parts become exorbitant then unavailable, the stock goes to zero, and other things I am not considering.

Both of those scenarios are absurdly hyperbolic and will never happen. What will happen is something in between those two hypotheticals. Some people and entities involved will come out OK, people and entities involved will take a hit. What will happen includes a few of those optimisms from the first scenario and some of the pains of the second. Without question, it will be a rough ride, and if you are directly involved, you’re foolish if you don’t brace yourself. Before you interpret that as grinding my axe, remember that I own a business with a high percentage of KTM owners as customers. I am smack in the debris path myself. Of course, like always, these things will work themselves out eventually and the sun will continue to rise and set each day.

I was cautioned by one industry person to avoid the appearance of piling on KTM along with the online mob. He has many contacts at KTM NA - friends really - and explained that morale is understandably low. I was already feeling a lot of emotion for the workers in Austria, who are thankfully being considered in the press much more than will occur here. It was too easy to put myself in their situation, waking up at Christmas, and having this shitstorm to deal with. He was doing the same as me, for the employees here. I have not stopped thinking about his comments, and I am grateful for his guidance and perspective.

Absorbing all the information I have over the last two weeks has been heavy to process. I cannot help but extrapolate it to the state of the motorcycle industry overall, and if you know me, you know what this industry means to me. However, this is an important discussion, and the way some of the professional moto media has been covering this is disingenuous. I think, whenever one can, it is best to face life's challenges head on. I am not celebrating this, not at all. Instead, I starting NOW to work out some idea of what the future holds for PMG, myself, and for the motorcycle industry.

What do you think that looks like?

Thanks for reading.

Brian Price
Owner
Atomic-Moto

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