Welcome, thank you for joining the second quarter 2023 earnings call of Bike24. Throughout today's recorded presentation, all participants will be in a listen-only mode. The presentation will be followed by a Q&A session. If you would like to ask your question, you may use the Raise Your Hand button to place your question via audio line or place them in our chat box. I would like to turn the conference over to Moritz Verleger, Head of Investor Relations. Please go ahead, Moritz.
Thank you, Fleur. Good evening, good afternoon, or good morning from wherever you are joining us virtually today, and welcome to our Q2 2023 Results Conference Call. Following our pre-release three weeks ago, today, we would like to update you on our non-financial as well as sales KPIs, provide a detailed inventory and PNL overview, and give you some insights on the full year guidance adjustments, finishing with looking ahead on what to expect for the months to come. Our presenters today are Founder and CEO, Andrés Martin-Birner, and CFO, Timm Armbrust. Andrés, the stage is yours.
Thank you, Moritz, and welcome, everybody. Before I will guide you through the quarterly update, let me give you a more general assessment of the current environment. We remain operating a challenging market situation. This is true for all market participants. I have never experienced such a tough conditions in the 21 years as the founder and CEO of Bike24. We see a basically robust market that gives enough support, that does not break away as we have seen in other e-commerce segments. The sudden and unexpected combination of subdued consumer sentiment and extraordinary high stock leads to the known challenges for everyone in the market, for wholesalers, for retailers, but also for manufacturers. All market participants have therefore adjusted their orders so that the available quantity of goods is now reduced. Margins for retailers will rise again in the coming quarters.
As soon as the consumer sentiment picks up again, we will also see historic growth rates again. The bike is incredibly popular. No one doubts the rising popularity of biking, as it comes along with three major advantages: so it's climate friendly, it's good for health, and it's efficient on short distances. We need to steer our company today through the current phase of continuance consumer reticence, and this means for the upcoming quarters, profitability counts even more and comes before sales growth. We at Bike24, we are steering in this direction. Measures we implemented in the last months already show the first good results. Let's now focus on the quarterly update. Although the German Consumer Index continues to stabilize month by month, it's still clearly behind its pre-COVID levels. Slowing inflation rates are showing an impact on improving consumer sentiment.
However, consumers are still selective on their spendings and price-sensitive, for discretionary products is high. On a more positive note, the high number of newly acquired customers shows that the cycling trend is still intact and expected to continue. At 83 million, the number of bicycles in Germany is higher than ever before. Our active customer base is about to reach 1 million, with more than 988,000 customers having made at least one purchase during the last 12 months. In line with the first quarter, this is primarily due to new customers generated in newly localized markets, Belgium and the Netherlands, but also France posted ongoing new customer growth. Given sales decrease of 6% in the second quarter, we had certainly expected more momentum in the second quarter. As you may recall, we had a very wet and cold spring in Germany.
This led many customers to postpone their investments in a new bike or upgrade their existing bike or amending their bike equipment. Nevertheless, our full bike segment again proved resilient and grew by 25%. After the Zweirad-Industrie-Verband published sales figures of -12% for e-bikes and -20% for bio-bikes for the period from January to May, we can say that we have clearly outperformed the market in this segment. Full bike sales made up 18% of total sales during the quarter, which clearly shows again that Bike24 has become the go-to shop for everything around cycling, not just for parts, accessories, and clothing. With significant sales growth averaging 40% in the localized markets, we are also continuing to gain market share here.
After Belgium, the Netherlands and Luxembourg were launched in February, we have now included them in the group of localized markets. The previous year figures have, of course, been adjusted. Within this group of six countries, Belgium and the Netherlands stand out with sales growth of 78% and 82%, 82%, respectively, in the second quarter. This confirms once again that our USPs, so that means broad product range, fast delivery, and best-in-class service, sell in other countries.... France also reported satisfactory sales growth of 41%, in addition to already elevated comparables after localization in early 2022. Finally, our adjusted EBITDA margin for this quarter came in at positive 0.9%.
Timm will go into the details later on. While it is behind our original expectations, it is reassuring to see that we improved our bottom line margin by more than five percentage points quarter-over-quarter, mainly driven by a better gross margin, despite a still highly promotional environment. This were the highlights of Q2 in a nutshell. Timm, it's now to you for the financials.
Thanks, Andrés. I would now like to share some details on the financial and non-financial KPIs of this second quarter of 2023 with you. As Andrés already mentioned, our active customer base increased by +17% to 988,000. This is primarily due to our successful localization efforts in France, Italy, Spain, Belgium and the Netherlands, where the number of active customers increased by 118,000. However, also the number of active customers in our core market, DACH, is 41,000 higher. Due to the increased number of new customers, the repeat order rate declined by -5.2 percentage points. Fewer orders as a percentage of total orders were made by existing customers. In sum, it is very promising that our customer base is growing even in challenging times, due to a successful new customer acquisition.
I would like to point out once again that this also counts for our core market, DACH. Bike24 is a leader in the German online pack market. We continue to increase our customer base year by year, and this, despite the Corona spike behind us, confirms that the cycling trend is still intact and Corona was a step up and not a one-off. In line with the repeat order rate, other active customer KPIs, revenue and average number of orders per active customer declined by 14 and 12%. That effect is driven by different factors. Firstly, a new customer counts as an active customer, even if that person just joined a couple of weeks ago and order less in a 12-month period. The high share of new customers actually leads to a negative effect for that KPI.
Secondly, due to the internationalization, the share of customers outside the DACH region is higher, and the average number of orders per year in these new countries is lower. Thirdly, the ordering pattern of our DACH long-term customers is negatively impacted. Reasons are that there was an unnatural spike during COVID, and the macroeconomic environment in Germany is still negative. Now let's move to the last customer KPI on that page, the average order value. Overall, the average order value was more or less constant. The average order value for PAC was down due to the consumer sentiment and the ongoing price pressures in all markets. Bike24 was mainly able to offset the negative effects in the PAC segment, so the strategic focus towards more full bike sales. Let's now focus on top-line performance in our two segments, full bike and PAC.
In terms of PAC sales, revenues were down -11% due to ongoing depressed consumer sentiment. Customer focused on the basics and avoided non-essential extensions, like a new helmet or a parts upgrade to optimize the bike weight. On top, the average order value is negatively impacted by the price pressure in the market, driven by the already mentioned overcapacities. It is important to understand that the decline in PAC sales was mainly driven by the average order value. The number of orders decreased by only 1.5%. This means that customers are still loyal and remain active Bike24 customers. Moreover, Bike24 is still able to attract new customers. The average order value will automatically increase when the pressure in the market decreases and the consumer sense starts to be better.
In addition, Bike24 was able to partly offset the negative impact of the PAC business with the full bike business. The growth of 25% with full bikes was significant. As already mentioned, in the first five months, the German market was down -20% on traditional bikes and -12% on e-bikes. When looking at the different geographies, we posted a decline of -9% during the first quarter of the DACH markets. Next to the ongoing macroeconomic headwinds, the very unfavorable weather, especially in Germany at the start of the season, led to a loss of the essential start of season sale. On the other hand, our localized market, which now also include Belgium, the Netherlands and Luxembourg, recorded a +40% sales growth.
The rest of the European Economic Area showed a decline of -20%, highlighting the importance of local expansion strategy and local content when comparing the development to the one in the localized markets. Revenue of rest of world were down -38%, similar to the developments in the previous 2 quarters. This made it less attractive for non-European customers to order with us. Let's now turn to inventory. Versus last year, so end of June 2022, we have a small decrease. For one, we have built up inventory substantially in the full bike segment. This was done intentionally and reflects our strategy of stepping up this product segment. The sales growth shows that this was the right decision. The biggest positive here is a significant decrease of -14% in PAC inventory.
The measures to sell off products with excess inventories were successful. On top of that, we took a more cautious approach when adding inventory to our platform. Now let's take a look to profitability. The development is in line with Q1, and the year-over-year drop in adjusted EBITDA margin was mainly caused by a lower gross margin. However, in comparing Q2 margin with Q1, we can see an improvement in both gross and adjusted EBITDA margins. Looking at the individual months, the positive trend is even more obvious. In April, the gross margin was 24.2%, in May, 25.5%, and in June, 27.7%. As already communicated, this is mainly because we managed to reduce discount on selected product codes. As soon as market prices and ultimately gross margins recover, we will directly see an impact on the adjusted EBITDA.
This is what gives us confidence that we will be able to return to our pre-COVID levels of high single- to low double-digit adjusted EBITDA margins in the medium term. Overall, the low market prices and the resulting decline in average order value had a negative effect on all other cost ratios. I would like to provide further details on the selling cost and personnel cost items. The main driver of selling cost is the increase in carrier cost. The cost per package in the core region increased by 8%. We started to partly pass that one to the customer in the DACH markets by charging EUR 2 for orders over EUR 100, which used to be free in the past. We are generating relatively more sales outside Germany, so shipping costs are naturally rising.
The development in personnel cost is partly misleading, and it is important to understand the details. Personal expenses increased due to the generally higher wages in Germany. Specifically, the 15% increase in minimum wage in October had an impact on all salary bands. This hides our success in increasing productivity. The number of FTEs in the head office was reduced by 4% compared to last year, June, despite three new online shops in Benelux. That drives the headcount in the marketing and service department. There's a similar development for the logistics sector. Bike24 was able to reduce the workforce by 2% despite the new warehouse in Barcelona. In total, we achieved an adjusted EBITDA margin of positive of 0.9%, and we are back at operating profitability. That's it for my side. Now, Andrés, back to you.
Thank you, Timm. I would now like to turn to our forecast for the full year 2023, which we updated on July 18th. We initially planned for significantly stronger growth and higher margins, but the market recovery is slower than expected. This year's spring, the start of the cycling season, was comparatively cold and wet. This unfavorable weather led to a postponement and partial loss of the early season period with a high full price share, which is so important for the recovery of margins in the second quarter. Combined with continued high inflation rates and their negative impact on consumer sentiment, we were forced to revise our expectations as communicated in July. As head office costs are ultimately spread over fewer sales revenues, EBITDA margins are also negatively impacted.
Instead of a positive adjusted EBITDA margin of up to 3.5%, we now expect an adjusted EBITDA margin close to the breakeven point. I would also like to mention that it means we will end the second half of the year with a positive, adjusted EBITDA margin. Please understand that it's very difficult to predict the speed of recovery of the bike market in the next months. However, our financial strategy for 2023 remains the same. We navigate Bike24 on a stable foundation through these times, and we'll clearly focus on profitable growth. We already mentioned in May. The macroeconomic environment remains the same. Consumer sentiment did not really improve, albeit less intense promotional activity or taking that all. Therefore, we have decided to focus on various initiatives in these three following areas to ensure that Bike24 is on a solid footing.
Number one, gross margin. We will work towards a further improvement in gross margin. This means that we will strategically evaluate our pricing policy depending on the product segment, and make discounting decisions based on parameters such as market availability, potential excess inventories, and purchase prices. These changes, combined with more conscious procurement, that means a more critical assessment of when replenishment orders are really necessary, will lead to further improvements in gross margin, having a direct impact on EBITDA. Number two, marketing. We will focus our marketing efforts and allocate our marketing budget to the markets with the best return on investment. This includes evaluating market prices in the countries concerned, as well as fulfillment costs in order to generate the highest possible incremental profit for each order we ship. Number three, complete cost control is a priority.
Cash positions, as well as projected cash outflows, are regularly monitored to ensure that the company remains on a solid cash basis and with minimized non-strategic spending and deviations from the liquidity plan. As you can see, we have a clear plan for the next quarters, taking the challenges, but also taking on the chances of the unbroken mega-trend toward biking in Europe. Thank you now for your attention. Now we are all open for questions.
Ladies and gentlemen, at this time, we will begin the question and answer session. Anyone who wishes to ask a question may click the Q&A button on the left side of your screen and then click the Raise Your Hand button or place your question in our chat box. One moment, please, for the first question. We already received the first question: How is current trading going? You mentioned a wet and cold spring. Weather in Germany these weeks wasn't better either, do you also see this in the July or August sales figures?
Maybe I catch this question. We saw indeed a drop, or little drop in sales in July and also beginning of August, previous to versus the previous year. To be honest, so the influence within the season, so the weather is present, but the influence is very small. What we just mentioned, our focus is profitability, so that means that we have given smaller discounts in July and also in August, and this is of course in line with our expectations. Maybe I can add, so full bike sales and also our localized market sales grew in July and also in August so far. I would say this is very encouraging.
Thank you very much. Another question: How do you manage to reduce discounting when there are still over capacity, capacities in the market?
Yeah, okay, maybe I will take the question. For sure, we do not fully eliminate discounts. We still organize our yearly summer sale, and the end of season sale that is really ongoing. However, we are very carefully which products or product segments are in high demand or have fewer availabilities, and then our aim is to increase the full price sales share there. We could do that way, or we can do it on one hand, reduce overcapacities for products with high availabilities, while at the same time increase margin with products that Bike24 is one of the few retailer offering in our stock.
Thank you very much. Do you also expect declining full year 2023 sales in the full bike segment as well, or how is this segment going?
Yeah, when, when we look back to the last seven months or also the beginning of August, so I would say on a full year basis, I, I definitely expect double-digit growth rates for traditional bikes and also for e-bikes. I think that we, that we will clearly above the current market forecast, so for the full, full market. I expect the decline of full bikes in the German market this year, so I think we will beat the market. I think this, this makes really us confident in the long run.
What we mentioned also in our presentation, that we see that the, that the trend for biking or the long-term, mid, midterm trends are really intact, and that this was also the right decision to, to invest in this specific category.
Thank you very much. Are you giving up your growth strategy now, focusing on profitability?
Yes, to be honest, when we look back to the last 21 years, and we look back to the year 2021, of course, there was and is really a growth story. I think we have really shown that it was possible to grow year by year with a persistent double-digit growth rates. To be honest, and what I also mentioned, is that we have never seen a situation like that in the last 20 years. It's more for us to look to a solid foundation. What I also mentioned, that profitability is a priority for us, and that's for us, yeah, really important.
Thank you very much. I received a question by audio line. Please go ahead, Tim Kruse.
Yeah. Hi, gentlemen. Thanks for taking my question. First of all, for Tim, did I recall correctly that you said volume for PAC was only down 1.5%? Maybe as addition to that, could you maybe give a bit of an indication how the volume, how the volume changes were in the regions, in the quarter?
No, that was not volume, it was order quantity. Yeah.
Order quantity. Yes, that's what I mean.
Order quantity. It's independently from the really, from the volume, the number of articles per basket. That was only down 1.5%. In the region, for sure, we, it's, that's in line with the revenue growth, yeah. We have a decline in PAC orders for the DACH market, yeah, and a growth in the localized markets.
... Okay. Then on the, on the covenants, Tim, could you remind us what your current covenants are and, and how you're sort of steering operationally compared, compared to those?
Yeah. We have, we have a minimum EBITDA that's starting to count, beginning of June, for the new financing contract. We have a minimum liquidity ratio, based on, yeah, it's the absolute number. Given that we have a long-standing business relationship with, three lenders, we are in constant communication with them. Yeah.
Maybe just sort of on current trading, how are you viewing in terms of, in terms of the, the covenants?
Right in the plan, yeah.
Okay.
Liquidity is not a problem. Also, if you look to the current trading, Andrés give a short update on the July figures. Revenue was down, but profitability was significantly up, and that's converted directly into a positive EBITDA. We are fully in plan there.
Okay, great. That's good to know. Maybe lastly, just sort of a more general question on, on the internationalization. Sorry about that. You mentioned that, while your, your shipping costs have gone up due to the higher international share, is it fair to say that internationalization is margin dilutive in general? What are your countermeasures to go against that?
Yeah. Our countermeasures, as you know, is our regional fulfillment center, yeah? That's why we opened Barcelona, and that will help to reduce the shipping price in the, in the future, also in other countries, yeah, and helps already in, in Spain, yeah. That's, that's our answer to it. If you send a parcel from Germany to, I don't know, the, the Nordics, then for sure it's per parcel, more expensive.
Okay
May, may I add one thing to your previous question? When Timm just said, profitability is up, we are speaking on a sequential month-by-month basis, right? It's not up versus previous year.
Yeah, understood. Understood. Those covenants are, are they for the full year or sort of what you achieve on the second half of the year?
No, no, the first covenant is what we achieve in the third quarter of this year.
Okay.
That is the first one, what's in the contract. Afterwards, it's the six months EBITDA for the second half year of 2023.
Okay. Thank you. Well, then, all the best, and see you in two weeks. Thank you.
See you. Thanks.
Thank you. Thank you very much, Tim, for your questions. I received a question from Anders Knudsen: Can you talk about your inventory situation as we are nearing the end of season?
Of course, we are now in a sales time. We started in July with apparel and now we are in the full bike sale time. We expect at the end of the year a lower stock level as end of 2022. I think we will see at the end of the Q3 quarter also a little decline versus last year and also versus end of Q2.
Thank you very much. I received a question from Lars Knudsen: What is a normalized inventory revenue ratio, and when do you expect inventories to be normal?
The normal ratio is on a 12-month basis, 25% of the revenue. We will make a big step towards end of the year to the 25%, but we will not reach it overall. We see that during 2024, that we that have changed the inventory structure again to the 25%.
Thank you very much. Well, in the meantime, we have received no further question. We therefore come to an end of today's earnings call. A big thank you also to the management for your presentation and the time you took to answer the questions. Should further questions arise at a later time, please feel free to contact Moritz Verleger from Investor Relations or us. For some final remarks, I hand over to Moritz.
Yeah, thank you, Fleur, and thanks everyone for following. Just as a reminder, we will attend the Montega HIT Conference in two weeks, and also the Berenberg, Goldman Sachs conference in Munich, end of September. Speak to you then. Take care and goodbye.
Thank you. Bye-bye.
Thank you. Bye.
Recording stopped.