Bike24 Holding AG (BIKE) Earnings Call Transcript & Summary

Good day, ladies and gentlemen. And on behalf of Montega, a warm welcome to today's earnings call of the BIKE24 Holding AG following the publication of the financial year figures of 2023. Today, BIKE24 will be represented by Founder and CEO, Andrés Martin-Birner; as well as CFO, Timm Armbrust; and Moritz Verleger from Investor Relations will be there as well. So the gentleman will guide us through the presentation and the results. After the presentation, we will move on with our Q&A session in which you will be allowed to ask your questions directly to the gentlemen. So having said this, Moritz, please go ahead. The stage is yours.

Yes. Thank you, Sarah. Good evening, good afternoon, good morning to -- from wherever you are joining us virtually today, and welcome to our full year 2023 results conference call. Following our pre-release earlier this year, we would like to update you now on our non-financial as well as the sales KPIs, provide a detailed inventory and P&L overview, and finish with some insights on our 2024 full year guidance. As always, our presenters today are Founder and CEO, Andrés Martin-Birner, and virtually joining us, CFO, Timm Armbrust. Andrés, the stage is yours.

Thank you, Moritz, and also a warm welcome from my side. As always, please allow me to start with the general update on the 2023 financial year, before I hand over to Timm for the business update and finishing with a general summary and our 2024 guidance. Despite the German consumer sentiment having improved slightly and overcapacities in the cycling space beginning to normalize, the cycling industry continues to navigate a difficult environment. Large bike manufacturers are reported to have several financial difficulties, which might lead to additional higher sales taking place. On the other hand, the bankruptcy of SIGNA Sports United and the shutdown of their subsidiaries in many European countries might allow for market shares to be distributed newly. Similar to previous quarters, our sales decline is solely caused by ongoing weak sales in the PAC segment, especially in the German-speaking countries. While parts sales are mostly recurring, as they need to be replaced after certain usage, purchases of accessories and clothing are rather seen as being discretionary and are postponed during times of unfavorable consumer sentiment. While, of course, some sales can be regarded as being lost, others will be caught up later again. In total, sales decreased by 13% during the financial year 2023. However, on a more positive note, a strong sales increase of 25% in the full-bike segment confirms that our investments into the full-bike segment pay off and show a high cycling commitment and ongoing interest from customers. Both e-bike as well as traditional bike sales increased at double-digit rates. The full-bike segment contributed 19% of total sales during the financial year 2023, up from 13% in 2022. Moving on to localized markets. Also during the last quarter of the year, the strong momentum of the BeNeLux markets accelerated with these markets growing 80% during Q4. On a full year basis, sales in the BeNeLux markets grew 41%, while growth in France, Italy, and Spain came in at 10%. Sales in southern Europe slowed down a bit as we concentrated our available marketing capacities in the German-speaking countries. In total, full year sales in all localized markets combined grew 18%. Moving on, full year adjusted EBITDA margin came in at negative 1.3% as it was dragged down by higher inventory write-downs, promotional activities and higher general costs. Timm will speak about the details later on, but in summary, the amount written off as a percentage of sales almost doubled versus 2022 and was predominantly recorded in the last quarter of the year, which led us fall slightly below our targeted EBITDA range. Inventory write-offs are recorded as cost of goods sold and therefore have a direct impact on gross margin. We do not expect similar high inventory write-downs in the future. Furthermore, and this is in line with the previous quarters, promotional activities across the industry continued to be elevated, which also negatively impacted gross margins. In terms of inventory, we made further progress towards a healthier position by replenishing more selectively in certain product segments. Full-bike inventory on the other hand was intentionally built to expand the assortment in this ongoing strong segment. To look ahead, for the financial year 2024, we expect to return to growth and a positive adjusted EBITDA margin. In particular, supported by strong full-bike sales, especially in the next 2 quarters, we anticipate sales growth of between 1% and 5%. Assuming fewer promotional activities going forward, the adjusted EBITDA margin will return to positive territory at between 0.7% and 4.2%. We will talk about the details later on. Last but not least, BIKE24 also extended its credit facility until the end of April 2025. The terms of the facility are mostly unchanged. This extension, however, gives us more flexibility in negotiating a longer-term agreement later during this financial year. So this was the intro from my side. Timm, over to you for the financials.

Yes. Thanks, Andrés. I would now like to share some details on the financial and non-financial KPIs of the year 2023 with you. Our active customer base remained more or less stable on a high level. Moritz, maybe you could switch to the next slide.

Yes. We have a technical problem here, I guess.

Sorry for that, but let's give us a minute, try to fix it.

Yes, 1 minute. I'll be back on the network in a second. Yes, here we go. Okay, Timm?

Yes, perfect. Thanks, Moritz. So let's start with the active customer base that remained more or less stable on a high level. This confirms to us that our customers return on a regular basis and that cycling is more than just a COVID trend, that is suspended ones lockdown measures for. The limited churn rate was, therefore, partly offset by new customers across Europe, especially in the new markets, the Netherlands and Belgium as a number of new customers more than tripled. The repeat order rate was slightly down to 69.3% as the customer behavior normalized to pre-COVID level. In line with repeat order rate, other active customer KPIs like revenue and average number of orders per active customer declined by 11% and 8%. This effect is driven by 3 factors: firstly, if a new customer joins BIKE24, that person has added to the active customer base, also he or she was inactive the full 12 months, and therefore, has a negative effect on the set of KPIs. More new customers, therefore, drag down the active customers' KPIs. Secondly, due to the ongoing internationalization, the share of customers outside the DACH region increases while the average number of orders per year from these customers is lower. Thirdly, given the ongoing negative consumer sentiment in the DACH region and reduced spending for discretionary goods, the order pattern of our long-term customers in this region is currently negatively impacted. To finish with customer KPIs, the average order value was only slightly down as a higher share of full-bike sales partly offset the current down trading in the PAC segment. Let's now focus on top line performance and our 2 segments, full-bikes and PAC. The strategic focus on full-bikes a couple of years ago now pays off. Due to the increased assortment and the focus on high-quality bikes, BIKE24 was able to escape the consumer and market conditions and was able to increase full-bike sales by 25% throughout the full year to now more than EUR 42 million. In terms of PAC sales, revenues were down by minus 19%. Discretionary subsegments like helmets or clothing were more affected. The PAC subsegment was less affected category due to the recurring nature of these kind of products. However, with a CAGR of 13% since 2019, the current level is still significantly above pre-COVID levels, which again shows the boom during the last years led to a step-up for the whole industry instead of just a one-off. The current sales dip is mainly a result of missing PAC revenues due to the consumer sentiment and the market price pressure as a result of our capacities in the whole bike market. In addition, unfavorable weather during the first half of 2023 led to a slow start to the season and required increased promotional activity to stimulate demand and reduce the overcapacities. Sales of full-bikes on the other hand have gone steadily at a CAGR of 46% since 2019. This again confirms that investing into this segment, which was one of our main IPO initiatives, was the right decision. Full-bike sales were particularly strong in newly localized BeNeLux markets with plus 162%. Also in great potential for follow-up sales. In addition, it is promising to see that our product portfolio is taken so well in 2 of the biggest cycling nations in Europe. When looking at the different geographies, we posted a decline of minus 14% during the full year for the DACH markets. In line with my comments during the previous earning calls, the ongoing depressed consumer sentiment, especially in Germany, is the main pain point here. On the other hand, our localized markets and within that, especially Belgium and the Netherlands, posted a combined sales growth of plus 18%. The rest of the European economic area showed a decline of 26%, and the revenues in rest of world were down minus 48%. This is mainly because of customers in non-localized countries returning to local players that were unable to deliver during the pandemic-related boom. However, if you compare the result of the localized countries with those of the non-localized countries, it becomes clear once again how successful the expansion into France, Italy, Spain, and most recently, the BeNeLux region has been. The figures of that slide underline the success of internationalizing the business. You see a 5-year overview of the localized sales development. With each additional localization, we saw an uptick in sales, which confirms the feasibility of our international playbook all across Europe and led to a CAGR of 41% since 2019. The recent bankruptcy of our competitor, SIGNA Sports United, caused some of their subsidiaries to shut down their operations in selected countries. That additionally will help BIKE24 to gain market shares in the coming years. Let's now turn to the balance sheet and with that, in particular, to inventory, a position that I now view as much more comfortable compared to the beginning of 2023. Our total inventory figure decreased both on a year-over-year as well as on a quarter-over-quarter basis. Throughout the whole year, our procurement teams have done a great job. Prices, and with that, margins were slightly increased for products where inventory is healthy in the market. At the same time, BIKE24 was able to reduce overcapacities. As already mentioned, the reported inventory figure includes inventory write-downs of EUR 5 million for the financial year 2023. In 2022, our full year inventory write-downs amounted to EUR 2.8 million, despite the total inventory figure being higher. This reflects the wave of goods that came on to the market in the second half of 2022 and are therefore older than 1 year on the reporting date. Full-bike inventory was intentionally built up to be able to serve the customer with the largest brand portfolio in the market. We believe with the growth rate we show in the segment, this is more than justified. In terms of profitability, we have a mixed picture here. When excluding the before-mentioned inventory write-downs, our gross margin improved steadily in the second half of the year month-by-month versus 2022. However, especially the weak margins in the first half of the year due to several overcapacities as well as inventory write-downs in Q4 led to a lower gross margin in 2023. Performance marketing costs increased slightly due to the localization efforts in Belgium and the Netherlands beginning of the year. Moving on, the development and personnel cost is partly misleading and is important to understand the details. While total internal headcount increased, especially in the IT departments, this is mainly a result of onboarding external staff and making them internal employees. This increases personnel costs but reduced operating expenses as internal stuff is cheaper than external support agencies. In general and admin departments, we see, in addition, staff were reduced by around 10%. This positive effect was reversed by general wage inflation. In total, we recorded a negative adjusted EBITDA margin of 1.3%. While this is certainly below our original expectations, we do expect and are already seeing significant improvements going forward. That is from my side. Now Andrés, back to you.

Thank you, Timm. Before moving to the outlook, I would like to have a brief recap of our achievements in 2023, a year full of headwinds. Throughout the whole year as well as during previous years, we posted an ongoing strong double-digit growth in the full-bike segment. This is despite a negative industry trend in 2023 and varies about a certain situation in the demand of full-bikes, whether traditional or e-bikes. We still see a strong desirability for all kinds of premium bikes. This will not only lead to ongoing albeit slower growth in the segment in 2024 but also offer great possibilities for tailored offers to our huge existing customer base. Second, we made further progress on our localization strategy. We launched country-specific websites for the Belgium, the Dutch, and the Luxembourg market with native language customer service and local content offers. The strong and accelerating growth rates in these countries speak for themselves. Lastly, and as Timm already outlined, we managed to reach our targeted inventory figure. In November, we posted a target of below EUR 80 million, and we have EUR 71 million of inventory on hand, we reached this comfortably even when excluding write-downs. This healthy inventory position will allow us to reset popular merchandise and have the latest models on hand for the upcoming cycling season. To finish, let's look ahead. With a return to growth to be expected for the second half of 2024 as demand for full-bikes is holding up and PAC segment is set to recover, we anticipate a sales growth of 1% to 5% for the full financial year 2024. Furthermore, we expect the adjusted EBITDA margin to recover sequentially, mainly thanks to gross margin improvements across all segments. In total, we expect to arrive at positive territory with an adjusted EBITDA margin of between 0.7% to 4.2%. That said, we expect most of these improvements to materialize primarily in the second half of the year. With that, thank you for your attention, and we are now open for questions.

Thank you very much for your presentation. We apologize for the inconveniences concerning with the presentation, but it seems like the slides are already in weekend mode. But here we go again. So let's have some question-and-answer session. [Operator Instructions] And we already received the first virtual hand by Wolfgang. So please go ahead and unmute yourself.

Okay. Let's start with 3 questions and then leave room for the colleagues. First, on the financing side where you managed to get a prolongation. Under these conditions you spoke now, do you expect a similar interest result for the full year, assuming that remains on current levels? Or are there any, let's say, one-off extraordinaries that could further burden the interest result of EUR 6.2 million we saw for full year 2023? That would be my first question. Then on the cost side, you mentioned smaller savings that are manageable during the year. Can you shed some light on the categories where this would come from because you already have a quite lean organization? And then I spotted free cash flow of EUR 5.4 million on the second or third page of your earlier report. Can you give us the bridge how you end on this EUR 5.4 million? That's it from my side for the moment.

Thanks, Wolfgang. Maybe I can take the first question or I think I take all the questions, but let me start with the credit conditions. So I guess that it is in line with the previous conditions. So we don't -- we will not see any significant increase in interest costs. For sure, we have a small arrangement fee that we have to pay for the prolongation. But on the other hand also, we will keep that we will pay down the debt by EUR 2 million per quarter. So that has a positive effect on our interest expenses. Regarding your second question, the cost savings. So overall, we see cost savings in personnel especially. We see that not in percentage of revenues because our revenues were down but the absolute personnel expenses were lower than last year. And yes, we have a lean organization but there is still some space to optimize. And on the other hand, also due to the lower sales, we need less service agents and less logistic employees. And regarding your third question, could you repeat it a little bit because I don't fully understand it?

You mentioned in your free cash flow calculation, you end for the full year '23 at EUR 5.4 million and I have problems to recoup this figure when looking at your full free cash flow or your full cash flow statement in your annual report. But I just want to, let's say, the bridge from operational cash flow to your free cash flow perspective.

Yes. I guess, so the difference between our, I would say, internal management reporting is especially the adjusted expenses, that's not part of the operation business. And that's the most difference here, I would say, to the yearly annual closes. But maybe we will also give you a detailed calculation afterwards that you could follow our comments here.

All right. Thank you so much for your questions. So we will now move on with the questions from Christoph, so please go ahead and ask your questions.

I'm jumping in for my colleague, Tim Kruse, today. Just a few follow-up questions from my side. So firstly, I would like to know where your optimism for the expected sales growth comes from as the markets declined in Q4. Is it only because of the strong full-bike sales? If you can say a little bit about that, that would be great. And then second question is regarding the EBITDA adjustments and what level of adjustments do you expect this year? And then lastly, I would like to know about the importance of the bike leasing. Is it very important for you which level of sales stands this category for? That would be it for the moment.

Maybe I can start with, yes, our optimism. So we see first that the current quarter started as expected and I think we are making good progress. On the other hand, we see that the overstock issues are disappearing step-by-step from the market. So we see really higher gross margins and higher sales are possible again for many brands and categories. And this is what has made us confident also for the coming months. And what is really different to, I would say, the last 2 quarters last year is that we very often had to choose, I would say, between margin or gross margin and revenues. And we were a little bit more defensive because when you see our stock situation, so it was very, very good for us. And that's why we had very often trade-off between revenues growth and gross margin, and we decided or we have opted for higher margins, especially in the last 2 quarters.

Yes. Maybe I will answer the second question. So regarding the adjustment, let's start with adjustments in 2023. So it was the biggest adjustments were the SAP introduction cost. And the reason here is that we are choosing the public cloud and all the big 4 auditors say that if you go to the public cloud, the initial cost for implementing SAP are not capitalizable and they don't match the requirements to capitalize it via IFRS. So that's the reason why we adjusted this cost because that's really a one-off item only for the introduction. And then there are some costs for the negotiation of the first prolongation of the credit facility and as well very insignificant cost for the SOP program for the senior management. For 2024, we expect roundabout adjustments of EUR 1.5 million to EUR 1.7 million. And again, we are not 100% done with the SAP introduction. That's with around about EUR 700,000 to EUR 800,000, the main part of the adjustment next year. And again, the SOP costs and some cost for the prolongation of the credit facility. And the third question was regarding bike leasing. Yes, it's very important for us. So I think since around about 6 months, we now have more than 5 bike leasing companies onboarded on our website, so the majority of all the employees could really buy a bike of BIKE24, we are leasing. And now that accounts for more than 15% of the revenues, so very important. And especially very important for us because we have very high-quality bikes on our side, and that helps to convert a customer more easily with such expensive and high-quality bikes.

Thank you so much for your questions, Christoph. So we will now move on with the questions from James. [Operator Instructions] So James, you can unmute yourself now.

Just a couple, if I may. The first 1 is around the covenants with the debt and the renegotiation. Do you mind just talking us through exactly what's on there now and the timing for each of the different covenants? You mentioned some of it has been waived until Q4 this year and also some gearing ratios. Mind just reminding us what exactly you have there now?

Yes. Sure. James, thank you for the question. So covenant is, first of all, it's a minimum liquidity in our company, yes. That's well at doing the whole year. And from Q4 on, we have a minimum adjusted EBITDA from a little bit less than EUR 1 million.

Okay, great. And then the next question I had was around the write-downs on the inventory, you see higher this year. Is that any specific part or is that just part of normal policy that required you to write down more?

Yes, it's part of the normal policy. So we don't change the policy here. It's still based on aging and the expected sell-off rate in the coming years and expected margins. And as you said, we -- or as Andrés already mentioned is that we don't expect any additional write-downs in the future, so outstanding write-downs because as you know, we have very long -- we have items with very long lifetimes. And for example, in air pump, it's still an air pump also in 2 years. But the policies were in place and we stick to the policies.

Okay, great. So it's just a policy thing rather than anything specific. That's clear. Next one for me was just can you kind of give us some more comments around the pricing situation in Q4 and around some of the Black Friday sales, how you saw that? And then also how you're seeing the pricing situation as you go into 2024 season?

Andrés, would you like or should I answer that?

Yes, maybe I can start and you can add something. So we were happy with the Black Friday revenues. But what I mentioned that, yes, it was some pressure from some competitors with, I would say, weaker competitors. And that's why we decided not to follow each, I would say, very low price. And when you see now our overstock or our stock situation, you see that it's, from our perspective, very healthy. And that's why we very often choose or opted for higher margins. And also in the Black Friday period, we had higher gross margins than in the year before. And that's, yes, very similar to the first weeks in 2024. That's how we, yes, control the company now. The focus is higher margins, profitable offers for our customers and that's our priority, yes.

Okay, great. And just 2 more, hopefully quick ones, if I may. What are your inventory expectations for the year? Should we expect inventory to continue coming down sort of year-over-year, obviously, to buy into the new season, but how should we expect inventories to trend throughout the year?

Timm, you have to unmute.

So overall, we see it very stable until end of Q3, yes. Maybe there we see slightly a pickup because then we have to, again, order the goods for the winter season. By the end of the year, we will see lower inventories than end of 2023, not significantly lower but lower.

Okay, that's great. The last one for me is, you've got this EUR 2 million a quarter to repay. Do you expect that you can generate enough cash each quarter from the operations to pay for that? Or is it almost you have to take up more with more of your loan to be able to do that? How do you pay that EUR 2 million additional each quarter?

To make that short answer, yes, yes. So we are really a good start with liquidity into the year with around about EUR 18 million, and we are still on that level at the moment. So we have said very good under control of our liquidity.

All right. Thank you so much. So by now, I would say we could come to the end of today's earnings call, so just let me check if there are new questions are in there. So we have person who -- just Wolfgang Specht. So yes, you can unmute yourself and just take another or all your follow-up questions, Wolfgang.

One additional question on localized markets. We saw you covering, let's say, the big cycling nations now having entered BeNeLux as well. Is there anything sizable left that you could think of targeting with fresh localized markets or is that pretty much done?

For the coming years, we see really good chances to roll out more or to grow with our business model to other countries. That's clear, yes.

I think what's important is that we see with the Nordics, yes, we have very good markets that we are not localized. They are looking for really quality high goods. And if you look to cities like Copenhagen, I would say that's comparable to the cycling nations, BeNeLux, so Netherlands and Belgium. And on the other hand, also we see in the eastern part of Europe, with Poland and a very big country that's where the marks of the bike market is increasing very significant. And more or less, what's also important in the future is with introduction, local currency is also Switzerland. That's part of the DACH market. But also there, we see more potential if we localize that market.

Thank you so much, Wolfgang. So this concludes our earnings call for today. So we will now come to the end. So thank you, everyone, for your shown interest in BIKE24 and your patience. And thank you to Andrés, and Timm, and Moritz for the time you took to guide us through the presentation and to answer the questions. So you can save, the participants, the date for 3rd of April so and for the virtual roadshow. I wish you all a lovely remaining day, a happy weekend, and turnover again to BIKE24 for some final remarks.

Yes. Thank you, Sarah, and anyone who wants to speak to us, feel free to sign up for the virtual roadshow in April. Thank you. Bye-bye.

Thank you. Bye-bye. Have a nice weekend.

Bye.