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

Welcome to the Pierce Group Q1 2024 report. [Operator Instructions] Now I will hand the conference over to the speakers, CEO, Göran Dahlin; and CFO, Fredrik Ideström. Please go ahead.

Good morning, everyone. This is Göran Dahlin, CEO of Pierce Group. And with me is Fredrik Ideström, our CFO. So diving directly into the Q1 summary. During the first quarter, we saw a strong improvement overall. The demand gradually improved throughout the quarter. Our sales grew versus the same period last year with 3%, and our margins improved versus last year with 5.9 percentage points. The improved margins was a result from a combination of increased prices, lower shipping costs and the reversal of our obsolescence provisions. Adjusted EBIT improved significantly from minus SEK 25 million (sic) [ minus SEK 21 million ] in Q1 2023 to plus SEK 7 million in Q1 2024. Note, though, that we had a significant positive effect from the reversal of our obsolescence provisions with SEK 9 million due to the successful work with managing our inventories. We have a solid cash position with SEK 278 million in cash, and this has been driven by our continued focus on stock efficiency as well as increased focus on our slow-moving stock. The market outlook remains uncertain, but we anticipate the modest improvement in customer sentiment over the course of 2024, and we will with our -- we will continue with our conservative approach in terms of purchasing and inventory to safeguard our strong liquidity position. However, we expect somewhat increased stock levels going forward in support of seasonal fluctuations, the need to ensure product availability and to capture future growth opportunities. Next slide, please. Looking at the KPIs that we track, the Trustpilot scores we use to track customer satisfaction. They continue to be on a high level across Europe. We continue to drive improvements in the customer experience. We have, for example, continued the free returns that we launched last year, and we have also implemented a much more generous approach to claims. We believe that this should influence our customer satisfaction and retention positively. Our private brand share grew in spite of large price increases on our private labels, and this shows the strength of our current private label offering. Next slide, please. As you can see from the chart to the left, the active customer base is down versus the same period last year despite increasing revenues. However, our customer base is slightly higher than the end of Q4 2023. On the right-hand side, you can see that the average order values continues to rise, and this is offsetting the lower order volumes. We have grown the AOV primarily due to price increases. And with this, I will now hand over to Fredrik.

Thank you, Göran. Good morning. This is Fredrik Ideström, and I'm the CFO of Pierce. As Göran mentioned, we are back to growth in Q1 2024. During the first quarter, our revenues grew with 3%, or 2% in local currencies. We see variances between our segments and the different regions in Europe where we are active. For instance, we see strong growth outside the Nordics in Offroad and in the Nordics in Onroad. We have continued, during Q1 2024, to improve margins versus previous year. And in the quarter, our prices to customers have increased versus the same period last year and in-freight costs have improved. We also recorded a positive impact of SEK 9 million or 2.5 percentage points of revenue in Q1 from reversal of our obsolescence provision, which is a result of our increased focus and taking actions on slow-moving stock. The improvement can be seen in the profit after variable cost that has increased versus last year with some 7 percentage points. Our restructuring program implemented in Q4 2023, delivered in line with plans in the quarter and successfully more than mitigated inflationary cost increases as well as negative FX impacts, leading to reduced overhead costs. Looking at the gross margin trend. To the left, we see that our gross margin continues to increase compared with previous periods. The positive development continues to be driven by price increases and lower shipping costs. And in Q1, we had a positive effect of 2.5 percentage points from the reversal of our obsolescence provision. As you may remember, in Q3 2023, we made an extraordinary provision for slow-moving stock which impacted gross margin negatively with 12 percentage points in that quarter, as can be seen in the graph. Shipping costs in relation to revenue continued to decrease and is 1.6 percentage points lower than 1 year ago, and we are now gradually nearing the pre-pandemic levels. This is partly due to our focus on selling off overstocked inventory and with higher associated in-freight costs. And we see a risk for potential increases in the coming quarters due to the ongoing situations in the Red Sea region, which we are monitoring closely. Net working capital continued to improve in the quarter, it decreased with SEK 21 million from the previous quarter and with SEK 185 million compared to 1 year ago. The reduction is mainly a result of focus on stock management initiatives and efficiency, as well as the adjusted assumptions for the inventory provision from Q3 2023. We do, however, expect somewhat increased stock levels going forward in support of the seasonal fluctuations, the need to ensure product availability and to capture future growth opportunities. Our financial position remained strong with SEK 278 million in net cash at the end of Q1 and a solid equity position. I will now hand over back to Göran.

Thank you, Fredrik. By the third quarter of last year, we made a pivotal decision to embark on a comprehensive transformation journey, which we call Pierce 2.0. This undertaking was aimed at simplifying, streamlining and modernizing several aspects of the company, from growth strategy, go-to-market approach, our operating model, our private brand portfolio, a complete overhaul of our IT systems, as well as our processes and organizational structure. At that time, we set a new vision for Pierce: To become the unquestionable leading e-tailer of the European market for gear, accessories and parts for motorcycle riding. And to realize this vision, we identified 7 strategic pillars that guide our efforts: to achieve absolute leadership in the Offroad segment and profitable growth in the Onroad segment; to have the highest customer loyalty in the industry; to create a simple and powerful go-to-market approach; to be the best in the industry in pricing and purchasing; to have market-leading value-for-money own brands; to have a modern and scalable tech stack; and a lean, fast and agile organization. We have successfully implemented our new simplified operating model and fostered an action-oriented and empowered culture. Decisions are now made much faster and more aligned with business requirements. The Pierce team is capable, committed and enabled, and this has been instrumental in our achievements thus far. However, our transformation journey is far from over. True transformation takes time, and 2024 will be a year of transformation, where we lay the foundation for Pierce being a prosperous company for many years ahead. In addition to the organizational enhancement, we are undertaking a comprehensive overhaul of our technology infrastructure. We are building a composable, cloud-based tech stack, comprising best-in-class systems to enhance our operational capabilities. Through process reengineering and automation initiatives, we aim to further streamline workflows and eliminate nonvalue-adding process steps. We're also exploring the integration of AI solutions to further optimize our operations. Additionally, we're committed to consolidate and build real value-for-money own brands, and we are on track to launch our first loyalty program in the near future. In conclusion, we remain firmly committed to our vision and strategic objectives. Now I hand over to Fredrik to finalize this presentation by informing about Pierce's new updated financial targets.

Thank you, Göran. So the Board of Directors of Pierce Group yesterday decided to update the mid- to long-term financial targets regarding the net revenue growth and the adjusted EBIT. The capital structure target and the dividend policy remain unchanged. The previous targets were adopted in connection to Pierce's IPO back in March 2021 and [ since ] been very different. Following the strategy revision, where we are now materially transforming the company in the near term, it was a natural path to review also the financial targets. The revision of the target is to reflect the prevailing conditions, including the uncertain markets in the markets where Pierce operates. And this is to be seen as an update rather than completely new targets. And our belief remains that the market drivers and the expectations will be broadly in line the external market study prepared in connection with the rights issue back in 2022 once the market normalizes. This ends our presentation for today, and now we're happy to answer any questions.

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

So the first question is on the mentioning of a more positive market development throughout Q1, and I wonder what you see as the specific reason for that? And also a bit curious if you see that, that has continued into Q2? That's the first question.

Yes. I can say we started the quarter very, very slowly. The beginning of January was the toughest time, I would say, in many years. Then gradually, it picked up. And I would -- and February and March became better and better. And though we do not give any guidance forward, we see that we have -- this continues into Q2 as far as we can see. And the reasons for this, I think it's a combination of different things. But we have seen that our customers are very passionate. They need to spend money on their passion. And I think that there is a demand that have not been -- that they have not been able to realize for the last years, and that people are now starting to buy again because they have to. So that's one factor. And the other factor I think is that we think our customers are becoming more optimistic about -- that this recession will end fairly soon.

Okay. Great. Then just a second question on the freight cost and also the -- due to the political tension here. And given the lag effect you have, is that something that you think will turn into a negative year-over-year effect already in Q2?

I would say that's difficult to say. I think previously, we have said that there have been a couple of months of delay from -- when we have the actual shipping invoice until we see it in the P&L. But I don't dare to give any indication of that for Q2.

Okay. Okay. All right. Then just the last question on this obsolescence provision reversal of SEK 9 million. So I think that you took a quite big provision last year. So should we expect more of that to come over the next few quarters? Do you think that is likely? Or is that more of a one-off thing, you think? How do you think about that effect over the next few quarters? That's the last question.