Pierce Group AB (publ) (PIERCE) Earnings Call Transcript & Summary

Good morning, everyone. Hope you're feeling good and got your coffee and very welcome to the First Quarter Earnings Call of Pierce. I'm Henrik Zadig. I'm the CEO, and I have Tomas Ljunglof here in the office. Let's move to the agenda on page 3, please. In terms of agenda, we'll start with a Q1 summary, and then we move into the financial update. And of course, we'll talk about the new share issue, and then we'll conclude with a Q&A. Page 4, please. Starting off with a summary and starting with the financials. As I said last time, we entered the first quarter with a focus to reduce the inventory and net debt. We report solid growth of 14% or 10% in local currencies and take market share in a declining market. Our inventory and net debt reduced, the working capital improved, while we took a large hit on the EBIT margin and we are of course, not satisfied with this. Given the uncertain macro environment, we want to reduce now the net debt and strengthen our financial capacity to continue to execute the long-term growth strategy. Therefore, we proceed with the new share issue. Moving to the operations. We do see the same macro challenges in the first quarter as we saw in the fourth quarter. In the beginning of the first quarter, we saw a small growth of the demand in the online market. But after the Ukraine war, the market has started to decline clearly and the traffic growth on the market is still negative at the start of the second quarter. On the supply side, we continue to face very high shipping costs and higher purchase prices from raw material inflation. What's new now is that we see some potential availability issues in pockets of our assortment in the coming quarters. And we still see only few signs that the market has adjusted the consumer prices upwards despite the cost increases that everyone is facing. And I have to say this is somewhat puzzling, but it's likely due to high inventories in the market, a softer online market versus pandemic times and the fact that the market is very fragmented on both the retailer and the supplier side. On the positive side, we see good traction within Onroad, which grows nearly 30%. So the trend from the previous quarter continues. This is driven by a stronger assortment, including several new external brands and several launches of new private brand products as well as more competitive pricing, and there is likely also an impact from reduced restrictions after the pandemic. Customer satisfaction remains on record level, which helps to improve sales from returning customers where we do see a good development. Our objective now is to position Pierce well for a strong rebound when the headwinds in the market ease, and we do this by focusing on 2 things; strengthening the balance sheet and optimizing the operations, and I'll come back to that in the end. Page 5, please. So since the pandemic distorts the figures in both 2020 and 2021, it's useful to look back more than one year when we look at the growth during the last 4 quarters. And when we do that, we can see that the growth rate, the CAGR in local currencies in previous quarters was around 15%. And in Q1 this year, it was somewhat higher at 17% versus the first quarter 2020. Page 6, please. Looking at the KPIs, the customer satisfaction scores continue an upward trend and remain on our best ever level of 4.3 out of 5. It is good to see this evolution despite all the supply chain disturbances that we all have experienced. And this is the result of a lot of work to improve the customer offering, processes, systems and service levels. Looking at the private brand, the growth there follows the overall revenue growth, meaning private brands and external brands are growing at the same rate. And overall, we see now a better traction on the private brand product development after all the COVID-related delays. Page 7, please. The active customer base is on the same level as last year. Compared to the first quarter 2020, the number of active customers is up 30%. We do see good customer acquisition, particularly within Onroad where we have 20% more new customers acquired this quarter versus the same quarter last year. And the number of orders is up 18% versus 2 years ago, but somewhat lower than last year. We have focused on increasing the average order value. So it is good to see that this continues growing to now SEK930 and higher AOV is very important, particularly as it reduces the freight impact and so compensates for some of the cost increases. I'll now hand over to Tomas to do the financial update. So let's move to page 9, please.

Good morning. I'm Tomas Ljunglof, I am the CFO of the company. After a revenue growth of 1% in local currencies in Q4, the growth in Q1 was 10%. We focused on reducing our stock levels during the quarter, which was challenging in a declining market. To drive traffic, we increased campaign activities, which lowered gross margin. This was an important factor for the year-on-year EBIT margin decrease. Page 10, please. The EBIT margin decreased were nearly 8 percentage points versus Q1 of last year, which was on the same level as the year-on-year comparison in Q4. The campaigning in Q1 was more aggressive and is included in the other gross margin part of the waterfall. Further, direct costs increased by 2 percentage points versus last year, which was the same increase as in Q4 and this related to the additional spending on performance marketing to drive traffic. It is worth mentioning that the cost per click increases the cost and pushed [indiscernible] marketing cost upwards. And also then that in the quarter, our free channels grew more than the paid channels, that partially compensated for that. Page 11, please. Offroad was clearly affected by the lower traffic holding back growth. As a significantly smaller player within the onroad segment, Pierce dependency on the market is not as high. An improved assortment together with more competitive pricing drove strong growth in many new customers. Both segments took a hit on direct contribution due to the same reasons as outlined earlier. Page 12, please. Net working capital decreased compared to Q4 mainly due to reduced inventory levels. The increasing net working capital during the last 3 to 4 quarters is an effect of several adverse factors. In the spring of 2021, we've forecasted continued steady growth. And due to the supply chain disturbances and product shortages that we did have during the pandemic, the order volumes included a limited safety stock. And after summer, the container prices and raw material prices started to increase and pushes purchase prices upward. That in combination with the decreasing traffic in the market resulted in a slower sales for Pierce anticipated. And as a consequence, the stock increased. To address that, we have since mid-November intensified our campaigning offers and invested more in direct marketing to drive sales and push down the inventory. And as a result, the net working capital did go down a little bit here in Q1. The overstock that we do have is linked to products that are not trend sensitive and they have a long history of good sales and to a large extent, they are our best sellers. Internally, we are, of course, working on the working capital basics at all times. We prolonged 30 times, trying to lower the minimum order quantities. And recently, we have also strengthened our analytical capabilities in this team. We have a model that has served us very well historically. But given the current uncertainties in the market, we will now initiate a more fundamental working capital review. Next page, please. That will be page 13. The last 12 months operating cash flow has been negative mainly due to adverse net working capital developments due to the reasons I just described. However, if you look 24 months back, the operating cash flow has been positive with SEK 80 million. Page 14, please. At the end of Q1, the net debt was SEK 138 million and the equity was over SEK 400 million. However, the net debt ratio was 2.6%, which is over our financial target of 2.0%. I will come back to that in the next slide. Please go to Page 16, please. As you perhaps have already seen in the announcement from last night, and as Henrik mentioned, the Board has decided to pursue a new share issue. The main purpose with new share issue has reduce, net debt and strength in our financial capacity, which will make it possible for Pierce to continue its long-term growth strategy. The new share issue will also clearly reduce the risk for not meeting bank covenants. And the target is to take in up to SEK 350 million from existing shareholders and the main owner, Procuritas is supportive and has indicated that they will take the pro-rata share. We expect to release the full terms towards the end of May, and the process is expected to be finalized at the end of Q2. Now I will hand over to Henrik.

Let's move to page 17, please. So the main objective now is to position Pierce well for a strong rebound when the headwinds in the market ease. And we do this in 2 ways to improve profitability and reduce working capital. First, as Tomas explained, we will strengthen the balance sheet through a new share issue and a working capital improvement program. Secondly, we will focus on optimizing the operations. And here we focus on cost efficiency and go-to-market. So let me take you through these 2 areas in a bit more detail, moving to page 18, please. On cost efficiency of the overhead cost base, this is a key driver of the long-term profitability target. We do have a history of working on cost management and scalability initiatives through process improvements, system upgrades and organizational changes. The effect of this is that the overhead cost ratio is going down. We today have a somewhat also lower number of employees if we exclude the warehouse employees compared to 3 years ago despite handling 60% more volume. So there is clear scalability in the business model. But of course, given the present situation, we need to do more, and we need to do it faster. During Q2, therefore, we'll intensify and accelerate the number of ongoing efficiency improvement programs to adapt our cost base to today. Page 19, please. While we meet strong headwinds in the near term, we remain optimistic about the long-term prospects for Pierce. Our category is well suited for online. It is a large and very fragmented market. We estimate the European market to be worth SEK 100 billion. And this is still a category which is underpenetrated online. So there is a lot of growth potential coming from the ongoing channel shift when sales is moving from physical stores to online. And in this market, Pierce is the largest online pure player in Europe and we have a broad assortment of unique value for money products. So we are in a good position to grow and take market share also in a weaker economic times. For that reason, we'll continue to invest in strengthening the customer offering. And here are some examples of what we did only in the first quarter. We signed 7 new external brands, especially focusing on Onroad. We also added a new category, mountain bikes. We know that many of our motor cross customers are also ride mountain bikes, and this is a sign of our scalable setup as we can launch new verticals with little extra work. We launched 20 new private brand products, including, for example, a new collection of Onroad helmets, [indiscernible] and the new value for money Onroad jacket in light material, which is adapted for Southern Europe. And on the marketing side, we then packaged that Onroad jacket and Onroad helmets together in a new mega kit campaign where customers could buy a kit of new private brand products. This was a big success throughout Europe and fueled the 30% growth of Onroad in the first quarter, and that is why private brands give us a competitive advantage. Right now, as we have said, it is challenging and uncertain times, but we are determined to build the company so that we come out in a stronger position when the tides turn. And that would conclude our presentation. So operator, let's open up for Q&As.

[Operator Instructions] We have one first question from Mr. Carl Deijenberg from Carnegie.

So a couple of questions from my side. First question is on the rights issue here. And I'm curious about the size here, you're tending to raise SEK 350 million while you are currently at the net debt of SEK 14 billion at the end of Q1. So I'm just wondering if you could reason a bit sort of the intention of the net proceeds after paying down the debt. And then maybe also how you came up to the number of SEK350 million.

We have a focus module where we outline a probable case going forward, I would say, perhaps it is a conservative case. And then we did various types of sensitivity analysis to that. And in order to be what we think on the safe side, we decided to go for the SEK 350 million.

Okay. And okay, moving on then. I have a few other questions. My second question is on the price hikes, which you're talking about here in the report. You're talking about smaller price hikes at the end of -- or at the start of Q2, and now we are roughly one month into Q2. So I'm just wondering if you could elaborate a bit of the reception here so far going into Q2 from your customers? And maybe also if you're starting to see price hikes among your largest competitors, maybe primarily then in Onroad in Europe.

Yes. I mean this is a price hike initiative that we did successively throughout April. So it was done gradually throughout April. So it's still too early to talk about the conclusions from that. What I can say is that so far, we have seen during the last couple of quarters, very few signs of competitors raising their prices. And I believe it is due to high inventories in the market. And if you couple that with a declining online market and the fact that the market is very fragmented, their fragmented retail landscape. I think that is the answer. I'm still convinced that over-time the prices simply need to come up in the industry. And it's high time it happens. And we're trying to take the lead here with pockets. And I would say this increase that we've done is for pockets of the assortment.

Okay. Well, and following up on that topic in between offroad and onroad, do you see any tangible difference there in sort of your need of competing or maybe availability of pushing through price hikes. Is that more needed with in offroad or in onroad or do you see sort of equal mix in between?

I mean I would say that it's needed. It's more needed in the offroad for us. It is a very strong segment for us, the offroad. We are a market leader online in offroad. And we think there is the best potential to raise the margins there. More competitive environment in general with lower margins also historically. We now focus all we can to try and restore the margins in 24MX. And the coming months will tell. Anything we can to make it happen.

Yes. And then my final question was on the sort of your assessment of the market here in Q1. You were talking about a flat market here in the first half. While it seems to have declined here quite severely in the second half of the quarter, I'm just wondering if you could provide sort of any guidance of your assessment of how much the market fell here in Q1 on an aggregated basis? Just to understand sort of how severe the contraction has been in the second half.

Yes. Overall, we did see a small growth in the first half and then we saw the market declining sort of up to 10 percentage points in the second half and that's how it's also continued then in the second -- in the beginning of Q2. So between 5% and 10% down is what it's trending at.

Next question is from Mr. Gustav Berneblad from Nordea.

A couple of questions here. Some of this has already been covered. But we have seen some shipping costs start to come down materially. When will this start to impact you earliest, would you say?

As we've said before, the shipping cost is connected to the goods that we inbound and it increases the inventory value and we take it as cost of goods sold when we do sell the inventories. So there is delay there on few months. So yes that's it. In a few months, given that the [indiscernible] prices continues down, we will see it in few months.

Okay. And also kind of a question there on the net debt and the rights issue. Should we interpret the rights issue to be required by lenders, would you say?

No, I wouldn't say that. We want to play it a bit on the sales side here. And if the headwind continues here, we want to have a bit of a buffer, as said, we've done this sensitivity analysis, et cetera.

Actually, we want to do this to take down the net debt to be more in control and be stronger as a company. I think it is important for us now to be strong in a company. There is a lot of uncertain times. There's a war going on in Europe. There's high inflation, costs are rising everywhere. And of course, it impacts the consumer. So it's very difficult to make projections about future demand and we want to be in a situation with no debt, given what could potentially play-out if all the worst scenarios come through. So that's why we want to do this.

Okay. I see. And just a final question here from my side. The inventory level is down from end of Q1. Can you comment anything on how you see the level at this point for you?

Yes. We do have another stock. It's meaning that we have too much compared to what would be optimal, but it is good things are one of our -- several of our best sellers, and the ambition is clearly to take it down further. But on the other hand, we don't want to do it an instant type of fire sale fashion, right, which could likely be done, but take it a bit, not slow, but putting it down in a controlled way. So it is on its way down, no doubt about that. It's also, of course, connected to the market development, et cetera. The more adverse market development, the harder it is, of course, to sell it, and there's a balance to be made there, of course.

Thank you, sir. We have no other questions. [Operator Instructions] It seems that we have no other questions, sir. Back to you for the conclusion.

Okay. Well, thank you everyone for listening in to this first quarter earnings call and we will be back with the release of the new share issue, the full terms there towards the end of May. And then of course, we released the second quarter towards the end of August. So with that, thank you very much. Have a good rest of the day.