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

Welcome to the Pierce Group Q2 2023 presentation. [Operator Instructions] Now I will hand the conference over to the speakers: CEO, Göran Dahlin; and CFO, Niclas Olsson. Please go ahead.

Good morning, everyone, and welcome to the second quarter Pierce earnings call. My name is Göran Dahlin, CEO; and I have Niclas Olsson, our CFO, with me.

Good morning, everyone.

Let me start by giving you a short introduction on myself as I was recently appointed CEO of Pierce after Willem Vos, who was acting CEO and left the business in June to pursue other opportunities. I joined Pierce in the middle of June. Prior to joining Pierce, I was CEO of SGDS Gruppen, one of the leading building materials wholesaler and retailer in Sweden with a turnover of SEK 19 billion. SGDS Gruppen operates in both B2B and B2C and has an important part of the revenue down to e-commerce. Before this, I was a Category Director for BAHCO, one of the leading hand tool manufacturers in Europe. I have a Master of Science in economics from the Stockholm School of Economics. And I must say I'm delighted to join Pierce. The company is well positioned in a market that is fundamentally attractive, even though the market condition has been very tough in the past year. I'm very optimistic about the future long-term development of Pierce. During the second quarter, we continued to face challenging market conditions but saw some relief compared to the first quarter, and have continued to increase our prices and prioritizing margin improvements over volumes due to our solid cash situation. The margin improvement has resulted in an adjusted EBIT of positive SEK 6 million compared to a loss of SEK 9 million last year. Let me break down this a little bit, starting with the operations sections at the top. We saw slightly improved market conditions, even if the online market still is declining according to our estimations, our assessment is that the online market declined 5% to 10% in Q2 as an effect of the macroeconomic headwinds. The decline was not as negative as in Q1, where we assessed the market to decline 15% to 20%. We estimate that demand will continue to be weak. And so far in the third quarter, we assessed that the market development is in line with the second quarter. Compared to quarter 2, a seasonal decrease in the third quarter's revenues is normal as the high season has ended, why we expect continued challenge during the coming quarter. Next point is that the margin improvement program is progressing according to plan. The program was implemented by the end of last year with the main focus to increase gross margins and reduce the variable cost. And in the quarter, we saw a positive impact on gross margin from our efforts to increase prices, and we also saw lower variable costs with improved efficiency in both the marketing and freight to customers. Last year, we also made some extra efforts to negotiate commercial terms with all -- with nearly all product suppliers, and we did this to preempt further price increases and to lower purchasing cost going forward. The new commercial terms should gradually kick in, and we expect to see the impact in the P&L later on this year. Gross margin improved versus Q2 last year, and this is actually the first time we can see gross margin improving year-over-year for 2 years. The strong cash position from the beginning of the year has given us a possibility to focus on margin improvement and implementing the price adjustments planned in the improvement program. The price increase was around 5% in the quarter compared to Q2 last year. In addition to this, we also see that the shipping prices continue to decrease. And compared with last year, the cost has decreased to 1.7% in relation to revenue. And then we continue with the next section, financials. We see that the decrease in revenue in line with the market development. The net revenue of SEK 441 million was a decrease of 2% compared with last year and 7% in local currency. We assess that this is in line with the market development. In Q2, as said, we have an improved adjusted EBIT. In the quarter, we reported profit for SEK 6 million compared with a loss of SEK 6 million last year. The improvement is driven by the activities to improve the margins together with the continued tight cost control. We have a strong cash flow, the positive profit development together with a reduced net working capital led to an operating cash flow of SEK 64 million compared to negative SEK 30 million last year. And we ended the quarter with a net cash position of SEK 179 million. So to summarize, we have been able to continue to increase our prices approximately 5% despite the decline in market. The margin after variable cost is increasing as we have been able to increase prices and be more effective within marketing and freight to customers. And also the shipping cost from Asia continues to give a positive impact in our P&L. The cash situation is solid at SEK 179 million. We estimate the demand to continue to be weak. And compared to quarter 2, a seasonal decrease in the third quarter revenues is normal as the peak season has ended, why we expect continued challenges in the coming quarters. Looking at our KPIs, the Trustpilot scores to the left, which we use to track customer satisfaction, continues to be on a high level across Europe. We continue to drive improvements in the customer experience. We are, for example, working on an initiative to improve delivery experience. So people have more options to select from when they get their parcels delivered. To the right, we see that our private brand products continue to show good resilience in the challenging markets. In Q2, the private brand share was 44% compared to 42% last year. This is despite the price increases that we have applied to our private brand range, and this shows that we have a compelling value proposition with our private label. Continuing with the KPI, as you can see from 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, and we saw less activity from both new and returning customers. On the right-hand side, you can see the number of orders for last 12 months. They are down in line with the reduced revenue levels, but the average order value continues to increase. I will now hand over to Niclas.

Good morning. This is Niclas Olsson, and I'm Pierce's CFO. During the second quarter, our revenue declined with 7% in local currencies. And as Göran said, we estimate that this is in line with the overall online market development. This year, we have focused more on improving margins than driving sales, and we have increased the prices to customers with some 5% versus Q2 last year. In the quarter, Onroad revenue development was worse than Offroad, but the underlying overall performance is quite similar between the segments. Last year, the Onroad segment had a new price-aggressive campaign that was very successful, especially outside Nordics. And this year's focus was on improving the margin for the campaign, which is affecting the sales some negative. Our changed focus from generating cash to improved profitability can be seen in the profit after variable cost margin that has increased with nearly 5 percentage points in the quarter. In the second quarter, we improved adjusted EBIT significantly and report a profit of SEK 6 million compared to a loss of SEK 9 million last year. The improved profit is driven by increased gross margin, as I will come back to, and effects from our profit improvement program as we have been more effective in the marketing spend and being able to reduce our cost for freight to customers. Looking at the left chart, we can see that from '21, the margin decrease as the cost per shipping increased and so did also the purchasing price from suppliers driven by inflated raw material costs. We were not able to forward the cost increase to our customers due to the overstock situation both at Pierce and at our competitors as a consequence from the declining market. In '22, the negative trend continue and our challenging cash situation and our focus to strengthen the liquidity position affected margin negatively. From the end of '22, we can see a trend shift when our improved cash position has given us the possibility to raise our margins. The improvement comes from price increases and lower shipping cost. The shipping cost in quarter 2 '23 was 4.9% in relation to revenue, which is 1.7 percentage points lower than last year. The prices for shipping is on the same level as pre-pandemic 2020. Hence, we can expect the continued gradual cost reduction even if the pace might slow down a bit. We have continued to reduce our inventory, and compared to Q2 last year, the value has decreased with 6% to SEK 459 million. In volume, the decrease was 17%. The net working capital was reduced with SEK 11 million compared with the same period last year as the positive effect from inventory development was somewhat offset by the lower short-term liabilities. Due to seasonality, the net working capital is normally lower at the end of Q2 and Q4, hence, an increase in Q3 is likely. The financial position was solid at the end of the quarter with equity of over SEK 700 million and net cash of SEK 179 million. I will now hand over to Göran to finalize the presentation.

The road map to improve profitability over time remains. This illustration has been included for some quarters. And please note that it's not an outlook nor a forecast, but more of a graphical and conceptual illustration of the key profitability drivers. The dark blue in the left was the situation in Q1 and before with an EBIT loss. Important to mention is that we believe that several of the negative gross margin drivers are temporary in nature, and the P&L will benefit from a normalization. Container prices are, for example, back on pre-pandemic levels, and we expect the online shift to affect market development in the future. Starting with shipping. The prices are back on pre-pandemic levels, as said, and at the time, the cost was 3% in relation to revenue, so we expect some further improvements here. Purchasing by end of 2022, we, as said previously, made an effort to negotiate the commercial terms with our suppliers. Here, we see further opportunities to negotiate with our suppliers for improved terms. There is also an overstock situation in the market still. And given our strong cash situation, we have a position to make more clearance deals, even though we are trimming our stock levels downwards. We have implemented a new pricing engine to be more surgical in optimizing our prices throughout even though we are trimming our stock levels. We're already seeing an effect of this new tool, and we are working hard to further develop it as well as our processes to leverage the relatively large opportunities we have in improved pricing. As part of the improvement program, we have done several changes within marketing. The marketing machine has been trimmed and the ROI targets revised to improve our marketing efficiency, especially within performance marketing. We still have a lot of work to do regarding how we are driving customer loyalty and generally to improve our marketing efforts by leveraging our customer data even better. Finally, scale. Several areas within the company are prepared to take on increased volumes with limited marginal cost. We have the potential to further simplify our processes through the usage of lean and to further digitize our operations. Again, please note that this is a long-term illustration of our path back to sustainable profitability and not an outlook nor a forecast. As said, we do expect to face continued challenges during coming quarters. During the last 2 years, Pierce has been mainly short-term focused due to the external macro challenges. Our improved financial situation means that we can work more long term again. And as I have started as the new CEO, it is natural to review and possibly recalibrate the strategy going forward. We will come back with updates on this in the coming calls. What we can say for now is that there are still geopolitical and macroeconomic uncertainties that are affecting our customers. So in the near future, we expect the market to continue to be weak. In this environment, we will focus on these 3 priorities. First, we will continue to mitigate the market uncertainties with a strong cash position. We will manage our stock carefully and be cautious when purchasing. The key here is that we accurately plan and forecast sales and our approach has been to purchase slightly less to what we forecast in order to protect a downward risk in market sentiment and to leave some room for clearance deal opportunities that we expect to be available. Secondly, we continue to execute on the financial program for improvements. We have possibilities to further improve our purchasing term, our pricing and also continue to increase our marketing and freight efficiency. And third, our efforts to improve the long-term scalability will remain. Our cash situation and the fact that our improvement program is benefiting margins gives us more room to work with our processes. That concludes our presentation for today. So operator, please open up for Q&A.

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

Göran and Niclas, congratulations on a very well-executed quarter. I have a few questions here, and I'll start with the gross margin. And you mentioned here that the large part of the increase here comes from lower shipping costs. So can you please talk a little bit about what you expect from this going forward? I mean is this mostly done now? Or will there be even more gains ahead? That's the first question.

Yes. If we go for the shipping costs, we are now having prices for containers from Asia and especially then China on the same price level in U.S. dollar as it was pre-pandemic and -- like in 2020. At that time, we were around -- the cost for us was around 3% of revenue. And yes, as today, it's still nearly 5%. So it's -- we should expect it to continue to decrease even. If we have started to watch out some of the costs now, I think the pace will slow down, but there is a possibility to decrease further if we look at the -- how it looked before the pandemic, as you can see there in the presentation.

Yes, that's great. And then another question on your price increases here, so up around 5% in the quarter. Going forward, is it sustainable to keep prices up year-over-year? And do you think could there even be more upside here to do? Or is this the kind of level that we should expect also going forward? That's the second question.

I think there are -- Göran here. I think there are 2 parts of that. It's external factors. We still see an overstock situation in Europe, and that means that our competitors, especially in the large markets are fairly price aggressive, trying to get rid of stock. That's our take on the situation. We think that, that will ease up and that -- so that there will be some room for a general price increase in the market, again, especially in the larger European markets. And then we have implemented a very sophisticated pricing tool, and we see already effects of that and we see that there are further opportunities in being more surgical in our pricing. So both internal factors and external factors, I think, are talking to that we should be able to increase prices further.

All right. Great. That's very interesting. And then one final question here. And that's on the purchasing prices here. You still talk about the inventories being up -- inventory -- the cost of inventory being up versus last year. But now I heard several retailers talking about cost inflation in sourcing from Asia coming down quite a lot. So is that also something that you see? And if this is the case, when do you expect that to kick in and show in the numbers? That's the third question.

The one part -- as we talked about this profit improvement program and we did this additional work in Q4, negotiating the terms, both to reduce the risk for further price increases going forward but also decrease the costs going -- decrease the prices. And that was done in Q4 last year. So it will -- that effect, we should see now during the autumn because it takes some time until the order arrives at the distribution center, and we actually send it to the customers. And then on the general market, yes, there should be some positive effects now when we see that the raw material, for example, is not on the extreme level as it has been.

The next question comes from Atte Jortikka from EVLI.

From my side, I have 2 questions. Firstly, on the inventory -- actually on the inventory composition. You commented that the number of articles has been reduced. Is this reduction across the whole assortment or are you focusing on certain segment of your products on this?

No. We are actually in all areas try to reduce the stock level. So there is not any specific articles that we are focusing on. It's general that we have a lot of -- we have too much stock that has been -- and especially maybe half year, the private brand assortment -- the private brand inventories was bigger, but we work on all areas. And then, of course, there are some areas -- specific areas that are worse than others, but in general, all over.

Okay. Then another question on the offline competition. You mentioned that it's now normalizing. Is this actually new development? And what is your assessment of this kind of offline competition going forward?

Didn't really follow here. Offline competition, yes, what we have -- we saw that during the pandemic, of course, the online had a huge positive effect as for every other branches. But now, of course, when the pandemic has gone away, we see that we have lost to -- back to the physical stores. But on an overall basis, we believe that the online shift will continue increase, even if there was a bump during pandemic and after pandemic.

[Operator Instructions] The next question comes from Rebecca Gustafsson from Carnegie Investment Bank.