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

Welcome to the Pierce Group Q1 Report 2025 presentation. [Operator Instructions] Now I will hand the conference over to the speaker, CEO, Goran Dahlin. Please go ahead.

Thank you. Good morning, everyone, and welcome to this Q1 2025 Interim Report Presentation. My name is Goran Dahlin. I'm CEO of Pierce, and thank you for joining me today. So here's today's agenda. I'll start with a brief overview of Pierce, followed by a financial update for the first quarter. Then I'll share some thoughts on the road ahead before we open up for Q&A. For those of you less familiar with us, Pierce is a leading European e-commerce platform for motorcycle gear, parts and accessories. The total addressable market was estimated at around SEK 100 billion in 2021. Although it's slightly contracted since COVID, it remains substantial and critically, it's still largely offline and fragmented. Pierce is the leading e-commerce player in Europe. We're not just a retailer, we're a specialist. Our assortment is uniquely attractive, combining the strongest brands on the market with a leading portfolio of private labels. We are the #1 player in Offroad category and one of the top in Onroad. And we're a truly pan-European company in the market. We operate localized website in 16 markets and serve more than 1 million customers each year. To the right, you can see some basic information about us. 2/3 of the sales are outside Nordics, almost 2/3 is Offroad, 1/3 is Onroad and 5% is other, which is primarily Sledstore. Parts and accessories make up each 20% of the sales and a little more than half of the sales is gear, and our own brand share is approximately 40%. The market we operate in is, it's a diverse product landscape, ranging from protective equipment like helmets and boots, to bike-mounted parts, to clothing and casual accessories. Each subcategory behaves a bit differently. Items like part and protection have a high rate of wear and tear, especially for frequent riders, especially in Offroad, making replacement a constant demand driver. Others like clothing align more with fashion cycles. Importantly, most of this market is still served through offline retail. In fact, only roughly 90% of the European market was online in 2021. So we believe that the shift to online will continue for quite some while. Important growth drivers for us is that online can offer a much wider selection and better availability than offline, and this provides superior convenience for the customers. The products we sell are also well suited for e-commerce and also a general growth driver long term is that the base of motorcycle rider is increasing. We operated in a fragmented landscape. There are 5 main different competitive segments. One is the online leading retailers such as 24MX and XLMOTO. Then we have diversified online and marketplaces, and that's like Amazon and eBay are 2 good examples; leading European omnichannel retailers that has a split between offline and online sales; brick-and-mortar, typically local physical players, many of them since COVID with some online presence; and direct to consumers. The brands in the market mainly sell through distributors and directly to large retailers, but some are also operating their own web shops to sell directly to consumers. Our direct competitors are a little bit more than a handful. We, again, is the largest e-commerce player in the market. We are the champion in the Nordics and we're a clear leader in the Offroad across Europe. Pierce is also the only pan-European player with local sites in 16 countries with local language, local payment options, customer service and local delivery partners. We're also the only player with a pan-European long-haul logistics setup with Pierce dedicated long-haul transportation across Europe that delivers products into the local injection points. The other players are primarily local champions in main European markets and most of them focus on Onroad. Several of them have financial owners, which we believe will facilitate the future market consolidation. And there is a possibility to create a player that is much larger than anyone else in the market with the capacity to carry a much wider assortment in stock than anyone else, providing a superior choice and fast delivery times, thus providing a superior customer experience. Furthermore, this player would have significant muscles to develop fantastic own brands, while also the sheer size would create a shift in power versus suppliers, enabling much stronger negotiation position with leading brands. And of course, it will yield substantial back-office synergies. Let's look at Q1. Despite the weak consumer sentiment early in the quarter, we achieved 13% year-over-year revenue growth. January and February were particularly soft as shopper concentrate their spending much more around key promotional periods like Black Friday and Christmas. However, March performance improved significantly as our seasonal stock arrived, allowing to scale back marketing investments. We prioritize protecting gross profit in absolute terms and expanding our customer base. That said, gross margin fell to 42.6%, a decrease of 3 percentage points compared to last year. The decline was driven by mix shift towards Onroad, higher inbound freight costs and a significantly lower obsolescence reversal than last year. Our cost increased by SEK 13 million, primarily due to SEK 9 million in transformation-related investments and around SEK 4 million in FX effects. These transformation costs are linked to the implementation of our new SaaS systems and cannot be capitalized under current accounting rules. At the same time, we're still depreciating our legacy on-premise systems. So this creates a temporary cost overlap, but one that will fade over time. From 2026 and onwards, we expect to see improved operating leverage as both cost streams taper off. Adjusted EBIT for the quarter was minus SEK 11 million compared to plus SEK 7 million in Q1 last year. Even if we had a very challenging Q1, I'm absolutely convinced that we're on the right track. I will elaborate more on why I'm confident in Pierce at the end of the presentation. Our capital position ended Q1 with SEK 175 million in cash. That's a decline from the high levels we held in 2024, but it's still a very solid position. Cash flow for the period was negative as we invested in our inventory to capture growth and increase customer satisfaction. Inventory levels are higher than last quarter, just as planned. Product availability is key to drive growth, customer satisfaction and retention. And we expect inventory to stay high or elevated to support our growth strategy going forward. Switching to some of the KPIs for the last 12 months, private label. We have a strong and growing offering of own brands. Our last 12 months private label share was 38% compared to 41% in Q1 the previous year. Many of our new private label launches are scheduled to arrive later in the season with only limited number reaching the market during Q1. At the same time, we're also unlocking significant growth opportunities within our external brand portfolio by enhancing product availability. This will remain a key growth driver for us, both now and looking ahead. As we are working to expand sales in both private label and external brands, we do not expect any major shifts long term for our private label share. Looking at our key customer satisfaction metrics, our Trustpilot scores remain consistently high and has a slight increase since Q4 2024. We also see very encouraging trends in the Net Promoter Score, which we're tracking internally, further reinforcing our progress in the customer experience and loyalty. As shown in the chart to the left, our active customer base has increased in Q1 for the second consecutive quarter. This is a very positive signal as expanding our customer base remain one of our highest strategic priorities. We are fully committed to continuing our efforts to drive customer growth, satisfaction and retention and gross profit in absolute terms. Looking to the right, the average order value also continues to trend upward. Compared to 2 years ago, AOV has increased 12%, including 2% increase versus last year. This uplift is primarily driven by a strong performance in high-ticket categories, particularly external Onroad gear brands. While these products come with a lower percentage gross margin, they contribute to a higher AOV and overall revenue growth. Then switching to more details in the financial update, looking first at our gross margin. As shown in the gross margin chart to the left, our margin declined in Q1 2025 compared to the same quarter last year. This was the result of deliberate strategic decision to, in a weak market, prioritize expanding our customer base and maximizing gross profit in absolute terms. This led to strong revenue growth, albeit at a lower margin. In 2024 Q1, gross margins was positively impacted by the significant reversal of obsolescence provisions totaling SEK 9 million. In Q1, this effect was lower at SEK 4 million, still a positive contribution to earnings, but not at last year's exceptional levels. While we've previously discussed obsolescence quite in detail, we now consider this routine part of our operational management, and we'll only highlight it when exceptional deviations occur. Shipping costs relative to our revenue increased by 1% or 1 percentage point. This reflects the higher freight rates observed in 2024, which have now materialized in our Q1 P&L. And given the ongoing geopolitical uncertainty, volatility in global shipping rates remains a significant risk. We're closely monitoring developments and our team are actively deploying a range of mitigation strategies to manage potential cost increases and operational disruptions. Switching to our overhead cost development. As said, operating expenses increased by SEK 13 million, which is a significant year-over-year rise, of course. The main drivers were SEK 9 million in transformation-related costs, which are temporary in nature and SEK 4 million in FX impact in our OpEx. As previously communicated, we're currently experiencing a dual impact on EBIT, both from elevated transformation costs and from a depreciation of our legacy systems. We anticipate both of these to decline during 2026, and that will yield a substantial cost leverage, which will be highly beneficial to EBIT. I would also like to mention the labor cost pressure we have in Poland. The minimum wage inflation in Poland acts as a benchmark for overall wage development, and that has increased nearly 50%, 5-0 percent since 2022, including an increase of over 20% last year alone. Given that 44% of our total labor costs are located in Poland, that salary expense represents our single largest cost category. A 20% increase in our largest cost base as we saw last year is extremely challenging to absorb. Despite this, we have managed to offset much of that impact through substantial reductions in FTE. Encouragingly, the trend of sharp increases in the Polish minimum wages appears to be easing. We now expect a more moderate increase of 8.5% this year, which is significantly lower than the 20% we saw in 2023 and 2024. Should this materialize, it will be a welcome development. Additionally, we incurred some extraordinary costs in Q1. Since I assumed leadership 2 years ago, we have made continuous progress in streamlining the organization. The progress is ongoing and occur step-by-step as we enhance our internal processes, roll out new system and expand our use of AI across the organization. Switching to our net working capital development. The net working capital has increased compared to the exceptionally low levels recorded last year. We are intentionally planning for inventory levels to remain higher than past year. This is deliberate strategic choice as a greater product availability plays a critical role in driving growth, enhancing customer satisfaction and improving retention. It is, in fact, a cornerstone of our positioning as a leading category specialist. The significant growth observed in March strongly correlated with our improved stock availability and higher inventory levels, clearly validating this approach. Also, we see a very strong correlation between customer satisfaction and stock availability. Fast and more accurate deliveries are imperative for good customer experience. Compared to 2023, though, where we had an even higher net working capital, we now have a much healthier inventory profile with a reduced share of slow-moving items, a higher proportion of A selling products. That said, we're not yet where we want to be. There remains a substantial potential to further optimize our stock and unlock additional growth. This improvement will not happen overnight. Rather, it's a gradual process that unfolds over the next 12 months as we continue selling out bad stock and acquiring new better stock. So looking forward, fueling growth and profitability. What are we planning to do? What are we working on? We are -- #1 is to strengthen our -- we are expanding and refining our assortment. We are improving product availability and shortening delivery. And with our new tech stack launching in the second half of 2025, we will gain significantly better control of our product and customer data, and this will enable an enhanced product presentation, personalized experience and a faster, more intuitive website. Together, these improvements will support both customer acquisition and retention. Then we're also expanding the business. We're accelerating the geographic expansion. When we have the new tech stack, we will be ready to launch fully localized website in 12 additional European markets, featuring local language, payment methods and delivery options. These markets are already served by our .eu site, and we believe that full localization will unlock further growth potential. Then we also want to scale adjacent verticals. We see good growth opportunities in what we call underpenetrated categories like mountain bike and moped scooter. We can grow here very efficiently, we believe, through cross-selling and by leveraging existing infrastructure. That means that we will have very limited incremental investments. We also are positioning ourselves for industry consolidation. Again, the European e-commerce market for motorcycle, gear and equipment is ripe for consolidation. The benefits of scale are clear. And to me, it's more a matter of when and who will consolidate this market. And I think that with our pan-European platform, Pierce is uniquely positioned to lead such a development. Then we always, of course, need to balance our margin and growth. We will continue to prioritize gross profit growth in absolute terms as it is the best road to maximize both short and long-term profitability. While our Onroad segment being larger and less penetrated may grow faster than Offroad, this shift may impact our margin percentage negatively. However, this growth provides leverage to negotiate better terms with suppliers, and we also remain committed to expanding our high-margin private label portfolio, especially within Onroad. And I would love next year if we could leave our negative cost gearing in our rearview mirror. Our transition to SaaS-based IT infrastructure is well underway. We have been working with this for quite some while, as you know. And although transformation costs cannot be capitalized, we're still incurring depreciation on legacy on-premise systems, and this caused a temporary cost overlap of quite some significance. And once this migration is complete, both cost streams will taper off, and this will enable improved operating leverage from 2026 and beyond. So even if we have had a tough quarter, strong headwinds, I remain fully confident in our strategic direction. 2025 will be heavily impacted by our transformation. But from this, we will benefit for many years ahead. And with this, I'm ready for Q&A.

[Operator Instructions] The next question comes from Adrian Elmlund from Nordea.

I have a couple of questions here. So firstly, could you give us some guidance regarding what you expect in terms of transformation costs going forward? You said that you now have some SEK 9 million in this quarter. Should we expect similar, higher or lower numbers in the coming quarters? Do you have any guidance on that?

As you know, Adrian, we're not giving guidance, but we have said that the transformation will continue throughout 2025. And I think that we've also said that at the end of the year, it's natural to expect that the transformation costs will gradually taper off.

Right. Okay. Fair enough. You did mention in the CEO comments here that you did see a rather significant sales recovery in March. I know that you said that you don't give guidance, but can you comment, should we expect similar strong growth here in Q2? Have you seen the market dropping off? Or is it continuing the significant growth that we saw here in March?

I think that what we saw in January and February was a repetition of what we saw in 2024, a very, very weak start of the year in January, February. And then just as it did last year, March became a quite good month actually. And last year, we had a quite strong growth in Q2 and a quite good Q2. So -- I guess that is my answer.

And also -- could you give us any update on the brand consolidation that you initiated last year? What's going on with that? And I'm trying to figure out here kind of what we should think about the private labels or private brands as a percentage of sales. It declined somewhat year-over-year, right? Could you give us any update on that?

That is true. It declined as we grew very much with external brands, primarily driven by that we have improved availability, quite significantly versus last year on the external brands, while the availability on the private label has always been good. And I don't think that we should expect any major changes in the share of private label because we're trying to grow both simultaneously.

Right. Okay. Lastly here, admin costs increased as well. Is this mainly or perhaps only a result of the high salaries in Poland? Do we expect you to reduce staff there? Or is this kind of a cost that you will have to bear with?

Sorry, again, what cost it kicked, I couldn't hear you.

Admin costs.

Yes. No, the primary driver for the overall cost increase is transformation and FX. And then, of course, the cost related to salaries in Poland has been a burden that we have absorbed, most of it through a decrease in FTEs, and we will continue to make the company more efficient step by step. We're launching a lot of new IT systems. We have worked a lot on our processes, and we're not at all done yet, but we are working quite a lot on that. And we have decreased already. When I came in, we were 256 white collars. Now we are 189, and I expect this to go down in a stepwise fashion going forward.

The next question comes from [indiscernible] Invest.

With regards to your statement regarding the shifting consumer landscape where consumers are being more price sensitive, aren't your private label brands in a good position for this shift? And secondly, what are your initiatives to further improving these brands?

Yes, that's true, and that's also true for the new markets that we are entering with fully localized sites, which are fairly price-sensitive markets. We are well positioned with our already much stronger private label offering than anyone else in the market actually. We are focusing on -- we're actually making one of the largest private label launches in Q2, later in Q2 than what we aimed at. But anyway, we're launching a lot of new products. And especially in the Onroad segment, we have significant potential and because we have today a much lower share of private label in the Onroad segment.

And could you please elaborate what you're seeing in the market at this time with regards to competitors, et cetera? Like you mentioned it was a hard, very tough first quarter here. Are your competitors seeing the same market environment? What are the latest happenings in the landscape?

Yes. As you know, there is no official data for the industry, unfortunately. What we have, what we can look at mostly or the signals mostly that we get are from our main suppliers, how we're doing in the market. And we get very positive signals from them. And this has increased, I would say, end of last year or second half of last year, we started hearing much more positive signals from our suppliers that we were doing really well compared to our competitors. So that's our belief, then the delay to get the official data from our competitors is quite significant as we are dependent on their annual reports, which is sometimes almost a year in delay. But that's the most reliable source we have is the amalgamation of all the different things that we hear from our suppliers in relation to our performance.

There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

Thank you all for listening, and I wish you a great continuation of the day and the week. Thank you.