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

Welcome to the Pierce Group Q1 2023 Report. [Operator Instructions] Now I will hand the conference over to the speakers: Acting CEO, Willem Vos; and CFO, Niclas Olsson. Please go ahead.

Thank you, and good morning, everyone, and welcome to the first quarter Pierce earnings call. My name is Willem Vos. I'm the acting CEO, and I have Niclas Olsson, our CFO, here with me in the office at Pierce. In terms of the agenda, we'll start off with the Q1 summary, and then Niclas will provide a financial update. And then I'll finish off with some reflections on the way forward, and then we'll be happy to take questions at the end. So first, let's start with the summary for the quarter. During the first quarter, we were faced with challenging market conditions that put pressure on the results. But thanks to our strong liquidity position, we were able to increase prices in a weak market. And by prioritizing margin improvements over volumes, we managed to strengthen the gross margin compared to recent quarters. So let me try to break this down a bit, starting with the operations section at the top. The market continued to be challenging in Q1 as consumer demand continued to be impacted by macroeconomic headwinds. Since the middle of Q1 '22, we have seen a decline in the online market. And our assessment is that the market was down versus last year by some 15% to 20% in the first quarter. The general macroeconomic situation seems to have had a clear impact on consumer spending, and the demand was generally weak. From a geographical point of view, we saw that the Nordic market seem to be impacted more by the weaker demand than the rest of Europe, so the markets outside of the Nordics. We still see some overstock in the market even though the situation seems to be generally improving to previous quarters. And we expect that the effects of the high inventory levels will still take some time to wash through the value chain as this has an impact not only on the retailers but also on distributors and manufacturers. The next point is that the gross margin improved versus previous quarters. Our strong cash position at the beginning of the quarter allowed us to prioritize margin over sales more than we did during last year. In the comparison quarter in '22, we had a strong focus on pushing sales to generate liquidity and to reduce net debt. But as a result of the rights issue in July '22 and due to our ongoing efforts to reduce inventory, our financial position has improved significantly. The financial improvement program is progressing according to plan, and we expect to gradually see more impact from this program in the P&L over the coming quarters. The main focus of this program is to improve the margin, but we also aim to improve our overall cost efficiency and our net working capital. And as a result of the financial improvement program, we saw that in Q1, margins started to improve versus previous quarters, and this was mainly from consumer price adjustments. And we also saw that our variable costs were reduced from ongoing efforts to increase our marketing efficiency. We also made an extra effort last year to negotiate commercial terms with nearly all of our product suppliers. And we did this to preempt further price increases but also to lower purchasing costs going forward. And we expect to see some further margin improvements towards the end of the year from this extra negotiation effort as the new commercial terms are gradually kicking in over the coming quarters. So moving on then to the next section with the financials at the bottom. So revenue and profits were under pressure. Net revenue came in at SEK 345 million, which is a decrease of 18% versus the same quarter last year. Last year, we took a more aggressive approach to generate liquidity and to reduce debt. And this helped us to grow by some 10% in a declining market. This quarter, we've taken a more balanced approach and prioritized margin over sales. And as a result, we saw the margins improve by 1.9% in Q1 compared to the previous quarter. Adjusted EBIT came in at minus SEK 21 million, and the EBIT decline was mainly driven by lower revenues and by a slightly lower gross margin as consumer price increases have not yet fully offset the increased purchasing cost. We continued to manage our cost base very carefully, not only in terms of our variable cost, but we also managed to keep administration costs flat year-over-year despite inflationary pressures. We have scaled back staffing levels that are directly connected to order volumes, both in customer service and in the fulfillment areas. And we also have fewer staff across the other functions compared to the same period last year. The operating cash flow was minus SEK 35 million for the period, and net cash at the end of the period stood at a solid SEK 105 million. Inventory levels continued to decrease, and we are gradually moving to a better inventory composition, although we still have pockets of overstock that we need to clear out. Now despite the pressure on revenue and adjusted EBIT for the quarter, we do see a few positives and let me try and summarize those. First of all, we have been able to increase consumer prices by some 5% to 10% across the board compared to Q1 last year. The gross margin is improving from previous quarters, and we expect to see further improvements from lower container prices and improved commercial purchasing terms later in the year. We also continued to see good effects on our variable costs, and we have been able to improve our marketing efficiency. And while the stock value is still impacted by the high shipping costs from last year, we do see that the stock has decreased by around 20% in units, and we are gradually looking at a more balanced assortments. Looking at the KPIs, the customer satisfaction scores continued to remain at a high level at around 4.3 out of 5. And that is across all stores and across Europe. And we're pleased to see that we continued to provide an offering and a customer experience that seems to resonate well with our customers. We continued to drive improvements in the customer experience area. And this quarter, we, for instance, finalized a big overhaul of our website structure to make it easier for people to browse around and to find what they're looking for. We are also currently working on an initiative to improve the delivery experience so people have more options to select from to get their parcel delivered. Whether it's home delivery, a pickup point or a locker for instance, we can tailor the local experience based on what is available in each of the markets. The private brands have shown good resilience with steady sales in a declining market. And our private brand share was high this quarter at 44% of revenue. And this is despite the price increases that we have applied to our private brand range. So it shows that even at higher price points, we still have a compelling value proposition towards more price-sensitive customers that are looking for some good value for money deals. As you can see here on the chart on the left, the active customer base is down versus last year, which is mainly due to less demand and less activity in the market. Both organic and paid traffic were down significantly, and we saw less activity from both new and also from returning customers. On the right-hand side, you can see the number of orders last 12 months is down in line with the reduced revenue levels. But the AOV continues to increase. So despite the fact that there is less activity in the market and customers seem to have less money to spend, we have been able to keep the basket size up, and this helps to drive efficiencies in the supply chain. I'll now hand over to Niclas to do the financial update.

Good morning. This is Niclas Olsson, and I'm Pierces' CFO. During the first quarter, our revenue growth was negative with over 20% in local currencies, and we estimate that the market decline with around 15% to 20%. As Willem said, last year, we drew a lot of sales with aggressive pricing as we needed to reduce our net debt due to the financing situation at that time. The effect was that during the first quarter 2022, we grew year-over-year with 10% despite a negative market development and this year, therefore, met tough comparables. The Onroad segment developed worse than Offroad in revenue growth. But the segment met significantly tougher last year revenue as we drew a very strong and price-aggressive campaign within the Onroad segment last year. The profit margin after variable costs increased by 0.6 percentage points in the quarter. Main driver for the improvement is lower cost for performance marketing. EBIT margin decreased by over 3 percentage points compared with Q1 last year. OpEx, depreciation and amortization are on the same level as last year in SEK despite cost increases driven by inflation and FX. Average number of white-collar workers in the quarter are 256 compared with 272 1 year ago. We have also rightsized the number of workers within the distribution center in line with the lower order volumes. But with the same cost in krona but with lower revenue in the quarter, the cost as a percentage of revenue increases and affects the EBIT rate negatively. If we focus on the development of gross margin, which will be the main driver for improved EBIT going forward, we can see that the negative trend line was broken in Q1 '23. Going back and looking at Q1 '22, we see that the margin decreased with nearly 7 percentage points versus same quarter '21, which was a consequence of the focus to drive sales at that time. Throughout 2022, we focused on generating sales and reducing inventory to stabilize the cash situation. And even though we were able to increase prices during the second half of 2022, we weren't able to compensate fully for the increased shipping and purchasing costs. In the first quarter this year, we, despite a weak market, have been able to shift our focus more towards margin improvement. And as a result, we have been able to increase customer prices with 5% to 10% versus Q1 last year. Our plan is to continue to gradually improve the pricing, which, together with decreased cost for shipping and the effects from supplier negotiations, should improve the margin going forward. To the right, we see that the shipping cost in the quarter -- shipping cost in relation to revenue was 5.5% in Q1. This was 0.5 percentage points higher than Q1 last year, but lower than the previous quarters. Container prices are back to prepandemic levels, but it will take some time to wash out all the shipping costs from past purchase from the inventory, which is why the cost will slowly but steadily decrease to prepandemic shipping markup levels. Net working capital increased in the first quarter compared to end of 2022. In the quarter, we have been able to continue to reduce the stock level, and compared to end of Q1 last year, the stock is down with SEK 47 million. In the quarter, the other liabilities have decreased, which affects the net working capital negatively. Liabilities related to purchases have decreased as the goods in transit is significantly lower compared to last year and also the VAT liabilities are down due to the lower sales. During normal conditions, net working capital should be somewhat higher at the end of Q1 and at the end of Q3 due to seasonal effects. Both the cash and equity position was solid when we closed Q1, and we are well prepared to continue executing our plans for the rest of the year. I will now hand over to Willem to finalize the presentation.

So let me come back to the key levers that will help us improve the company's profitability over time and share with you the progress that we have made over the quarter. And note that the picture that is shown on the slide is not an outlook or a forecast, but it's more of a graphical and conceptual illustration of the key profitability drivers. The starting point to the very left in the dark blue is the current situation with an EBIT loss in Q1. Now first of all, we believe that several of the negative gross margin drivers are temporary in nature, and the P&L will benefit from a normalization. We have already seen the container shipping prices normalized to prepandemic levels, and we also expect growth to return in the online market on the back of an online channel shift. So the next bar on the chart is related to purchasing. And in the last 2 quarters of '22, we made a significant effort in negotiating commercial terms across our supplier base. We have done this additional push to preempt further purchase price increases and to improve the existing commercial terms. These commercial improvements from product suppliers will gradually add back margin into the P&L towards the end of the year. We also revisited our outbound freight suppliers to renegotiate terms and to optimize the transport carrier network across Europe. These implementations in the transport network have now been implemented. And we will continue to fine-tune the transport network on an ongoing basis to drive further cost efficiencies and to improve customer delivery time lines. Then let's proceed with pricing and give you an update on the progress made so far. So first of all, we have now complement -- completed the implementation of a new pricing engine. And this pricing engine allows us to be more surgical in optimizing consumer prices across all stores and all markets compared to the manual processes that we ran before. We also still expect that we can pass on the cost increases more rapidly to our customers when the overstock situation in the market further normalizes. This quarter, we have already increased prices by some 5% to 10%. But we now see more opportunity to refine and fine-tune our pricing approach on the back of this new pricing platform. And then we have marketing. As part of our improvement program, we have trimmed the marketing machine and revised the ROI targets in our performance channels to improve the overall marketing efficiency. In Q1, we saw that the marketing expense improved by some 2%. But at the same time, we had to invest more to offset a further decline in our 3 channels, which is also related to the general slowness in the market, so the efficiency gains do not yet fully show in the P&L. Then we have the economies of scale. And over time, we expect to continue reducing our overhead costs in relation to revenue. We have the organization and systems in place to handle larger volumes at low marginal cost. We still have potential to further digitize the backbone of our operation and to streamline our system landscape. And we will also continue with initiatives to further improve the customer experience and to lower our operating costs. And if we do this successfully, then this will clearly add further cost savings back into the P&L. Again, please note that this is a long-term illustration of our path back to profitability and not an outlook or forecast. In the here and now, there is still a high level of uncertainty in the market, and we do expect that the remaining quarters in '23 will be challenging as well. Let me conclude this presentation by clarifying our main priorities. As we are now almost halfway through the second quarter, we can see that the market decline seems to be slightly improving, and our comparables are also somewhat less challenging than in Q1. But even though the market decline in Q2, so far, seems to look slightly better than in Q1, the outlook continues to be weak. And there are still quite some geopolitical and macroeconomical uncertainties that are affecting consumer behavior. So in that context, we will continue with the following 3 priorities. The #1 priority in the short term is to maintain a strong cash position in order to mitigate the uncertainty in the market. Given our solid cash position, we can continue focusing on margin improvement initiatives. We will manage our working capital carefully, and we will also take a cautious approach to purchasing new stock. And the key here is that we try to accurately plan and forecast sales, and then our approach has been to purchase slightly less to what we forecast in order to protect any downward risk in market sentiment. But this will also then leave us some room for clearance deal opportunities that we expect will be available given the general overstock situation in the market. Secondly, as we mentioned before, our program to improve the financial performance is progressing according to plan. And it remains a key priority to ensure that the actions that we have taken and the commercial improvements that we have negotiated start landing in the P&L over the coming quarters. And lastly, we will continue with our daily work to improve the scalability of our fixed cost base by simplifying the business and by improving processes and systems. This will help contain our costs in the current market environment. And it will also solidify our position when the market gradually normalizes over time as we can then drive further scalability improvements in the P&L on the back of larger order volumes. That concludes our presentation for today. So operator, let's open up for Q&A.

[Operator Instructions] The next question comes from Daniel Ovin from Nordea.

First, one question on the overall market improvement, the small improvement that you are seeing now in Q2. Perhaps you can elaborate a little bit more on this. What segment would that be? And also, is there any particular market where you see this slightly better development? And also perhaps mentioning a bit more on how you perform relative to that market as it seems that you slightly -- performed slightly worse than the overall market in Q1. So is that also continuing then in the beginning of Q2? That's the first question.

Yes. I think the -- I mean, obviously, the market in Q1 was down, by our assessment, 15% to 20%, right? And then we only just started Q2, but what we have seen is that the decline in the market seems to improve a little bit. And it's a bit subjective, right? We don't really have very solid data points around it, but it is based on the information that we get out of the market, but also looking, for instance, at our tools like Google, we look at the impressions in the market that relate to the keywords that we are known for. In terms of geographical area, I would say that the Nordics has maybe come to life a little bit more after Q1, maybe related to the weather, I don't know. But again, it's all very early days, and there's still a high level of uncertainty in the market. So it is just the first indication. And when it comes to our performance, we don't really do any forecasting, I would say or...

I think we can also say around the market share. Yes, we probably lost a little bit in Q1, and that's as we -- if we compare to Q1 last year, as we drew quite a lot of revenue last year as we grew with 10% compared to market decline. But I would say, going forward, we don't expect to lose market shares. This is probably more a relation to the Q1 sales last year, where we pushed a lot.

Yes. Okay, that's very helpful. And then another question on this freight cost situation where you have this quite long lag now. So I mean if you calculate 6% to 9%, you would have been over that already in Q4 according to my calculation. But now it takes longer. I guess it's also because inventories are taking longer to flush out, so to speak. But if we look at it now, if we still go into Q2 then, I mean, is it fair to assume that in Q2, you will be quite a lot, actually, lower freight cost impacted versus Q2 last year? Is that a fair assumption? Or maybe you can comment a bit around that.

Yes, it's a fair assumption, yes. If we look at Q2 2022, we were at 6.6%. And this quarter, Q1 '23, we are on -- at 5.5%. So already there, we have quite a decrease, and the trend line going forward should be -- continue going down. So yes, there should be a positive effect compared to Q2.

Yes. Okay. Perfect. And then I have a last question on the different segment here. So I was a bit surprised when I saw the Onroad channel being so much weaker versus the Offroad channel, but you explained it now a bit in the call here that you ran pricing campaigns -- aggressive pricing campaigns last year and now you've seen them to have been holding back a bit more. But when -- even when I look at the contribution after variable cost is down like 41% year-over-year. So do you think that was a successful move? Has it been even worse, you think, if you went more aggressively on price? Or maybe you can comment a bit around your thinking on the strategy and if that is something that you would be continuing to do going forward. That's the last question.

If we take Onroad, that performed worse compared to last year. If I remember correct right now, I think that the growth in Onroad last year was over 30%. And we had a campaign we call it the Mega kit campaign. That was a totally new campaign last year in that segment. And it was -- we priced it really aggressive to drive both on sales and getting new customers. This year, we had continued with this campaign, but it was not new, and we have also increased the prices to take care of the margin. So I would say, in general, Offroad and Onroad, there is a bit difference on the comparables, but they are performing more or less the same. There is not a big difference right now between Offroad and Onroad.

The next question comes from Carl Deijenberg from Carnegie.

So a couple of questions from my side. First, starting off here on the sales development. I mean coming back to this, I guess, I understand the comparison in Q1 last year is quite tough on the sales. But I think it's -- at least in my calculation, and I mean even if you look on a 2-year stack, I guess it's fair to assume that the market has contracted or maybe, let's call it, worsened sequentially here since Q4. So could you say anything -- I mean, you talked about a 15% to 20% contraction here in Q1. Could you remind us of what your assessment was for Q4 and maybe the start of Q2? Are we talking 10% to 15% contraction or 5% to 10%? Or what's your assessment there?

I think in Q4, we said around minus 10%, right? That was the assessment. Again, it is not so easy to get these numbers right. So it's a bit of a range around that. So you're right in that from Q4 to Q1, we saw a further contraction. And when it comes to Q2, it's a bit hard to say. We don't really have the data points, I would say, right now to -- we're only just into the quarter. So I think we need to wait a couple of months to see how it really pans out. There's still a high level of uncertainty. Also, take into account that the Q1 is typically -- it's a bit of a preseason. In Q2, normally, the season has started. There's also some dynamics around that, that maybe people have waited a bit to make their purchases at the beginning of the season. So Q2 is a bit hard to estimate what the range is, the level of improvement in the range, yes.

Yes. Yes. Okay. Then I wanted to ask a bit on the inventory composition here. You're talking a bit about it still that you maybe have a bit of overstock but that the situation is quite improving. And I just wanted to ask if you could share any sort of target that you have by the end of the year, your inventory level, for example, in relation to sales or any figure on that. Just to understand the ambition on the cash flow development here going forward throughout the year would be very helpful.

I think we have -- actually, hard to give that because it's very dependent on the market development going forward. But yes, we have an ambition, of course, to improve the stock situation. I think I don't -- can give you anything more on that.

I mean, practically, right, it's difficult to really have a long planning horizon. So what we're doing is that we almost do -- on a rolling wave basis, we look at how the sales evolves and what our forecast is for the coming months. And that then defines the budget that we allocate to further procurement and we look at the stock consumption. So it's more on a rolling wave basis. We're trying to manage it. So it's not so easy to give an outlook for a number at the end of the year, I'd say. But as Niclas was saying, clearly, the ambition is to try and reduce the overstock levels in the pockets that we still have.