Bike24 Holding AG (BIKE) Earnings Call Transcript & Summary

Welcome and thank you for joining the Second Quarter Call -- 2023 Earnings Call of BIKE24. Throughout today's recorded presentation, all participants will be in a listen-only mode. The presentation will be followed by a Q&A session. [Operator Instructions] I would now like to turn the conference over to Moritz Verleger, Head of Investor Relations. Please go ahead, Moritz.

Thank you, [ Fleur ]. Good evening, good afternoon or good morning to -- from wherever you are joining us virtually today, and welcome to our Q2 2023 results conference call. Following our pre-release 3 weeks ago, today, we would like to update you on our nonfinancial as well as sales KPIs, provide a detailed inventory and P&L overview and give you some insights on the full year guidance adjustments, finishing with looking ahead on what to expect for the months to come. Our presenters today are Founder and CEO, Andres Martin-Birner; and CFO, Timm Armbrust. Andres, the stage is yours.

Thank you, Moritz, and welcome, everybody. Before I will guide you through the quarterly update, let me give you a more general assessment of the current environment. We remain operating a challenging market situation, and this is true for all market participants. I have never experienced such tough conditions in the 21 years as the Founder and CEO of BIKE24. However, we see a basically robust market that gives enough support that does not break away, as we have seen in other e-commerce segment. But the sudden and unexpected combination of subdued consumer sentiment and extraordinary high stock leads to the known challenges for everyone in the market for wholesalers, for retailers but also for manufacturers. All market participants have therefore adjusted their orders so that the available quantity of goods is now reduced and margins for retailers will rise again in the coming quarters. And as soon as the consumer sentiment picks up again, we will also see historic growth rates again. The bike is incredibly popular. No one doubts the rising popularity of biking as it comes along with 3 major advantages: So it's climate friendly, it's good for health, and it's efficient on short distances. But we need to steer our company today through the current phase of continuous consumer reticence, and this means for the upcoming quarters, profitability counts even more and comes before sales growth. We at BIKE24, we are steering in this direction. Measures we implemented in the last months already showed the first good results. Let's now focus on the quarterly update. Although the German consumer index continues to stabilize month by month, it's still clearly behind its pre-COVID levels. Slowing inflation rates are showing an impact on improving consumer sentiment, however, consumers are still selective on their spendings and price-sensitive for discretionary products slide. On a more positive note, the high number of newly-acquired customers shows that the cycling trend is still intact and expected to continue. At 83 million, the number of bicycles in Germany is higher than ever before. Our active customer base is about to reach 1 million, with more than 988,000 customers having made at least 1 purchase during the last 12 months. And in line with the first quarter, this is primarily due to new customers generated in newly localized markets, Belgium and the Netherlands, but also France posted ongoing new customer growth. Given sales decrease of 6% in the second quarter, we had certainly expected more momentum in the second quarter. As you may recall, we had a very wet and cold spring in Germany. This led many customers to postpone their investments in a new bike or upgrade their existing bike or amending their bike equipment. Nevertheless, our Full-Bike segment, again, proved resilient and grew by 25%. After the Zweirad-Industrie-Verband published sales figures of minus 12% for e-bikes and minus 20% for bio-bikes for the period from January to May, we can say that we have clearly outperformed the market in this segment. Full-Bike sales made up 18% of total sales during the quarter, which clearly shows again that BIKE24 has become the go-to shop for everything around cycling, not just for parts, accessories and clothing. With significant sales force averaging 40% in the localized markets, we are also continuing to gain market share here. After Belgium, the Netherlands and Luxembourg were launched in February, we have now included them in the group of localized markets. The previous year figures have, of course, been adjusted. Within this group of 6 countries, Belgium and the Netherlands stand out, with sales growth of 78% and 82%, respectively, in the second quarter. This confirms once again that our USPs, so that means broad product range, fast delivery and best-in-class service sell in other countries. France also reported satisfactory sales growth of 41% in addition to already elevated comparables after localization in early 2022. Finally, our adjusted EBITDA margin for this quarter came in at positive 0.9%. Timm will go into the details later on, but while it is behind our original expectations, it is reassuring to see that we improved our bottom line margin by more than 5 percentage points quarter-over-quarter, mainly driven by a better gross margin despite a still highly promotional environment. So these were the highlights of Q2 in a nutshell. Timm, it's now to you for the financials.

Thanks, Andres. I would now like to share some details on the financial and nonfinancial KPIs of this second quarter of 2023 with you. As Andres already mentioned, our active customer base increased by plus 17% to 988,000. This is primarily due to our successful localization efforts in France, Italy, Spain, Belgium and the Netherlands, where the number of active customers increased by 180,000. However, also the number of active customers in our core market, DACH, is 41,000 higher. Due to the increased number of new customers, the repeat order rate declined by minus 5.2 percentage points. Fewer orders as a percentage of total orders were made by existing customers. But in sum, it is very promising that our customer base is going even in challenging times due to a successful new customer acquisition. I would like to point out once again that this also counts for our core market, DACH. Also, BIKE24 is a leader in the German online PAC market. We continue to increase our customer base year-by-year. And this, despite the corona spike behind us, this confirms that the cycling trend is still intact and corona was a step-up and not a one-off. In line with the repeat order rate, other active customer KPIs, revenue and average number of orders per active customer declined by 14% and 12%. That effect is driven by different factors. Firstly, a new customer count as an active customer, even if that person just joined a couple of weeks ago and order less in a 12-month period. The high share of new customers actually leads to a negative effect for that KPI. Secondly, due to the internationalization, the share of customers outside the DACH region is higher and the average number of orders per year in these new countries slower. Thirdly, the order pattern of our DACH long-term customers is negatively impacted. Reasons are that there was an unnatural spike during COVID and the macroeconomic environment in Germany is still negative. Now let's move to the last customer KPI on that page, the average order value. Overall, the average order value was more or less constant. The average order value for PAC was down due to the consumer sentiment and the ongoing price pressures in all markets, but Bike24 was mainly able to offset the negative effects in the PAC segment, so the strategic focus towards more Full-Bike sets. Let's now focus on top line performance in our 2 segments, Full-Bike and PAC. In terms of PAC sales, revenues were down minus 11% due to ongoing depressed consumer sentiment. Customer focus on the basics and avoided nonessential expenses, like a new helmet or in part upgrade to optimize the bike weight. On top, the average order value is negatively impacted by the price pressure in the market, driven by the already-mentioned overcapacities. It is important to understand that the decline in PAC sale was mainly driven by the average order value. The number of orders decreased by only 1.5%. This means that customers are still loyal and remain active BIKE24 customers. Moreover, BIKE24 is still able to attract new customers. The average order value will ultimately increase when the pressure in the markets decreases and the consumer sense starts to do better. In addition, BIKE24 was able to partly offset the negative impact of the PAC business with the Full-Bike business, so both of 25% with Full-Bike was significant. As already mentioned, in the first 5 months, the German market was down minus 20% on traditional bikes and minus 12% on e-bikes. When looking at the different geographies, we posted a decline of minus 9% during the first quarter of the DACH markets. Next, the ongoing macroeconomic headwinds. The very unfavorable weather, especially in Germany at the start of the season, lead to a loss of the essential start of season sale. On the other hand, our localized markets, which now also into Belgium, the Netherlands and Luxembourg, recorded a plus 40% sales growth. The Rest of the European economic area showed a decline of minus 20%, highlighting the importance of local expansion strategy and local content, and compare with the development to the 1 in the localized markets. Revenue of Rest of World were down minus 38%, similar to the development in the previous 2 quarters. The euro currency became stronger again, and with that made it less attractive for non-European customers to order with us. Let's now turn to inventory. Versus last year, so end of June 2022, we have a small decrease. For one, we have built up inventory substantially in the Full-Bike segment. This was done intentionally and reflects our strategy of stepping up this product segment. The sales growth shows that this was the right decision, but the biggest positive here is a significant decrease of minus 14% in PAC inventory. The measures to sell off products with excess inventories are successful, on top of that, we took a more cautious approach in adding inventory to our platform. Now, let's take a look to profitability. The development is in line with Q1, and the year-over-year drop in adjusted EBITDA margin was mainly caused by lower gross margin. However, when comparin Q2 margin with Q1, we can see an improvement in both gross and adjusted EBITDA margins. Looking at the individual months, the positive trend is even more vicious. In April, the gross margin was 24.2%; in May, 25.5%; and in June, 27.7%. As already communicated, this is mainly because we managed to reduce discount on selected product quotes. As soon as market prices and ultimately gross margins recover, we will directly see an impact on the adjusted EBITDA. This is what gives us confidence that we will be able to return to our pre-COVID levels of high single to low double-digit adjusted EBITDA margin in the medium term. Overall, the low market prices and the resulting decline in average order value had a negative effect on all other cost ratios. I would like to provide further details on the selling costs and personnel cost items. The main driver of selling cost is the increase in carrier costs. The cost per package in the core region increased by 8%. We started to partly pass that 1 to the customer and the targets by charging EUR 2 for orders over EUR 100, which used to be free in the past. In addition, we are generating relatively more sales outside Germany, so shipping costs are naturally rising. The development in personnel costs is partly misleading and it is important to understand the details. Personnel expenses increased due to the generally higher wages in Germany. Specifically, the 15% increase in minimum ratio in October had an impact on all salary bands. This hides our success in increasing productivity. The number of FTEs in the head office was reduced by 4% compared to last year, June, despite 3 new online shops in Benelux. That drives the head count in the marketing service department. There's a similar development for the logistics sector. BIKE24 was able to reduce the workforce by 2% despite the new warehouse in Barcelona. So in total, we achieved an adjusted EBITDA margin of positive of 0.9%, and we are back at operating profitability. That's it from my side. Now, Andres, back to you.

Thank you, Timm. I would now like to turn to our forecast for the full year 2023, which we updated on July 18. Yes, we are literally planned for significantly stronger growth and higher margins, but the market recovery is slower than expected. This year's spring, the start of the cycling season, was comparatively cold and wet. This unfavorable weather led to a postponement and partial loss of the early season period with a high full price share, which is so important for the recovery of margins in the second quarter. Combined with continued high inflation rates and the negative impact on consumer sentiment, we were forced to revise our expectations as communicated in July. As head office costs are ultimately spread over fuel sales revenues, EBITDA margins are also negatively impacted. Instead of a positive adjusted EBITDA margin of up to 3.5%, we now expect an adjusted EBITDA margin close to the breakeven point. I would also like to mention that it means we will end the second half of the year with a positive adjusted EBITDA margin. Please understand that it's very difficult to predict the speed of recovery of the bike market in the next months, however, our financial strategy for 2023 remains the same: Navigate back BIKE24 on a stable foundation through these times, and will clearly focus on profitable growth. We already mentioned in May but the macroeconomic environment remains the same. Consumer sentiment did not really improve albeit less intense promotional activity are taking their toll. Therefore, we have decided to focus on various initiatives in these 3 following areas to ensure that BIKE24 is on a solid footing. Number one, gross margin. We will work towards a further improvement in gross margin. This means that we will strategically evaluate our pricing policy depending on the product segment and make discounting decisions based on parameters such as market availability, potential excess inventories and purchase prices. These changes, combined with more conscious procurement that means a more critical assessment of when replenishment orders are really necessary, will lead to further improvements in gross margin, having a direct impact on EBITDA. Number two, marketing. We will focus our marketing efforts and allocate our marketing budget to the markets with the best return on investment. This includes [ re-allocating ] market prices in the countries concerned as well, as fulfillment costs in order to generate the highest possible incremental profit for each order shipped. Number three, complete cost control is a priority. Cash positions as well as projected cash outflows are regularly monitored to ensure that the company remains on a solid cash basis and with minimized nonstrategic spending and deviations from the liquidity plan. As you can see, we have a clear plan for the next quarters, taking the challenges and also taking on the chances of the unbroken megatrend toward biking in Europe. Thank you now for your attention, and now, we are all open for questions.

Ladies and gentlemen, at this time, we will begin the question-and-answer session. [Operator Instructions] We already received a first question. How is current trading going? You mentioned a wet and cold spring, whether in Germany, these weeks wasn't that there either. So do you also see this in the July or August sales figures?

So maybe I catch this question. So we saw indeed a drop, a little drop in sales in July and also beginning of August versus the previous year. But to be honest, the influence within the season, so the weather is present but the influence is very small. But what we just mentioned, our focus is profitability so that means that we have given smaller discounts in July and also in August. And this is, of course, in line with our expectations. Maybe I can add. So Full-Bike sales and also our localized market sales grew in July and also in August so far. And I would say this is very encouraging.

And another question, how do you manage to reduce hedging when there are still over capacities in the market?

Okay. Maybe I will take the question. So for sure, we do not fully eliminate discounts. We still organize our yearly summer sale and the end of season sale that is really ongoing. But however, we are very carefully which products or product segments are in high demand or have fewer availabilities, and then our aim is to increase the full price sales here and there. So we could do that way or we can do it, on 1 hand, use overcapacities for products with higher validities while at the same time, increase margin with products sent back to [ the force ], 1 of the few retailers offering enough stock.

And do you also expect declining full year 2023 sales in the Full-Bike segment as well? Or how is this segment going?

Yes. When we look back to the last 7 months or also the beginning of August, so I would say on a full year basis, I definitely expect double-digit growth rates for traditional bikes and also for e-bikes, and I think that we will clearly above the current market forecast for the full market that I expect the decline of Full-Bikes in the German market this year. So I think we will beat the market, and I think this makes really us confident in the long run. And what we mentioned also in our presentation that we see that the trend for biking or the long-term, mid-term trends are really intact in that this was also the right decision to invest in this specific category.

And are you giving up your growth strategy, now focusing on profitability?

Yes. To be honest, when we look back to the last 21 years and we look back to the year 2021, of course. So there was and is really a growth story, and I think we have really shown that it was possible to grow year-by-year with a persistent double-digit growth rates. However, to be honest, and what I also mentioned, is that we have never seen a situation like that in the last 20 years. So it's more for us to look to a solid foundation and what I also mentioned that the profitability is a priority for us. And that's for us, yes, really, really important.

I received the question by audio line. Please go ahead, Tim Kruse.

Yes, gentlemen. First 1 for Timm, did I recall correctly that you said volume for PAC was only down 1.5%? And maybe as addition to that, could you maybe give a bit of an indication how the volume changes were in the regions in the quarter? And then...

So that was not volume, it was order quantity.

Order quantity. Yes, that's what I mean.

So it's independently from the -- really, from the volume number of articles per basket. So that was only down 1.5%. And in the region, for sure. So it's in line with the revenue growth, yes, so we will -- we have a decline in PAC orders for the DACH market and a growth in the localized markets.

Okay. And then on the covenants, Timm, could you remind us what your current covenants are and how you're sort of steering operationally compared to those?

Yes. So we have a minimum EBITDA that's starting to count beginning of June for the new financing contract, and we have a minimum liquidity ratio based on just -- yes, so the absolute number. So given that we have a long-standing business relationship with 3 lenders, we are in constant communication with them.

But maybe just on current trading, how are you viewing in terms of the covenants?

While in the plan, yes? So liquidity is not a problem. And also, if you look to the current rating, Andres gave a short update on the July figures. It was -- revenue was down but profitability was significantly up, and that's converted directly into a positive EBITDA. So I think we are fully in plan there.

Okay. Great. That's good to know. And then maybe lastly, just sort of a more general question on the internationalization, sorry about that. You mentioned that while your shipment costs have gone up due to the higher international share, is it fair to say that internationalization is margin dilutive in general? Or what are your countermeasures to go against that?

Yes. So our countermeasures, as you know, is our regional fulfillment centers, yes? That's why we opened Barcelona, and that will help to reduce the shipping price in the future also in other countries, yes? And helps already in Spain. So that's our answer to it. But if you send a parcel from Germany to, I don't know, the Nordics, then for sure, it's per parcel. More expensive.

May I add 1 thing to your previous question? When Timm just said, profitability is up, we are speaking on a sequential month-by-month basis, right? So it's not up versus previous year.

Yes. Understood. Understood. And those covenants are there for the full year? Or sort of what do you achieve in the second half of the year?

No, that's it. First, a covenant is what we achieved in the third quarter of this year. That is the first one. What's in the contract? And afterwards is the 6-month EBITDA for the first -- for the second half year of 2023.

Okay. Well then, all the best and see you in 2 weeks.

I received the question from [indiscernible]. Can you talk about your inventory situation as we are nearing the end of season?

So the -- of course, we are now in a sales time, so we started in July this with apparel. And now, we are in the Full-Bike sale time. So we expect to the end of the year a lower stock level as end of 2022. And I think we will see at the end of the Q3 quarter also a little decline versus the last year and also versus end of Q2.

I received a question from [indiscernible], what is a normalized inventory ratio? And when do you expect inventories to be normal?

A normal ratio is, on a 12-month basis, 25% of the revenue. So we will make a big step towards end of the year to the 25%, but we will not reach it overall, yes. So we see that during 2024 that we -- that have changed the inventory structure again to the '25.

Well, in the meantime, we have received no further questions. We therefore, come to an end of today's earnings call. A big thank you also to the management for your presentation and the time you took to answer the questions. Should further question as a delay of time, please feel free to contact Moritz Verleger from Investor Relations or us. For some final remarks, I hand over to Moritz.

Yes. Thank you, [ Fleur ], and thanks, everyone, for following. Just as a reminder, we will attend the Montega conference in 2 weeks and also the Berenberg and Goldman Sachs Conference in Munich end of September. So speak to you then. Take care, and goodbye.

Thank you. Bye-bye.

Thank you. Bye.