This meeting is being recorded.
Good morning, and a warm welcome to today's earnings call of the Bike24 Holding AG, following the publication of the Q3 figures of 2023. The CEO, Andrés Martin-Birner, the CFO, Timm Armbrust, and the Head of Investor Relations, Moritz Verleger, will speak in a moment and guide us through the presentation and the results. After the presentation, we will move on with a Q&A session, in which you will be allowed to place your questions directly to the management. And with this, we are looking forward to the presentation, and I hand over to Mr. Verleger.
Thank you. Good evening, good afternoon, good morning, from wherever you are joining us virtually today, and welcome to our Q3 2023 results conference call. Following our pre-release last week, today we would like to update you on our non-financials, as well as sales KPIs, provide a detailed inventory and PNL overview, and give some insights on the full year guidance adjustment, finishing with looking ahead on what to expect until the end of the year. Our presenters today are Founder and CEO Andrés Martin-Birner, and CFO Timm Armbrust. Andrés, the stage is yours.
Thank you, Moritz, and also a warm welcome from my side. As always, please allow me to start with the general update on the quarter before I hand over to Tim for the financial update, finishing with the business update and some more insights into our recently updated 2023 guidance, as well as a general summary. The cycling industry continues to navigate a difficult environment, and we see first competitors facing financial difficulties. We, of course, followed the recent announcements around Signa Sports United and are constantly evaluating its consequences for the cycling market. However, while in the short run, additional overcapacities might arise, we are still convinced by the mega trends for the industry as a whole and keep executing our initiatives as communicated during the IPO.
The success of the initiatives can be seen in the double-digit growth rates in the full bike segment, as well as ongoing growth in the localized markets. With the German consumer index reversing its trend and declining again since August, it shows that the environment to sell discretionary products did not improve in any way. While the market for replacement parts is more resistant to a negative consumer climate, sales of rather discretionary goods like accessories and apparel proved to be more difficult. Disproportionately strong revenue decline in the parts, accessories, and clothing segments of an average of -23% was the main reason for the total sales decline of -16% versus Q3 2022. However, on a more positive note, this was partly offset by ongoing strong sales growth in the full bike segment of 26%.
Given the current difficulties the full bike industry currently faces, this is an extraordinary result and shows that we continue to take market share from other players, whether online or offline. Buying an e-bike online is the new normal, if one doesn't want to make a compromise, whether in color, model, size or price. That said, the full bike share of total sales increased to 21% from 14% in Q3 2022, and sets our business model on a more diversified basis. Moving on to localized markets. When we launched our local webshops in Belgium, the Netherlands, and Luxembourg, beginning of the year, consumer sentiment deteriorated already significantly.
However, I'm glad we took the decision back then to execute the launch even in a difficult business environment, because these markets now perform strongly and offset a small sales decrease in the markets like Spain, France, and Italy, that were already localized some time ago. The Netherlands and Belgium stand out, particularly with +123% and a +77% growth, respectively, and prove that we can also grow in highly penetrated markets, rather in terms of cycling penetration and higher online shopping penetration. When looking further down to the adjusted EBITDA margin, we are again glad to see an improvement, both on a year-over-year basis, as well as another sequential improvement to now 3.9%.
This was exclusively driven by a stronger gross margin, which improved sequentially for the fourth consecutive quarter, and of course, year-over-year from 24.8% last year, Q3, to now 27.1%. This improvement is despite ongoing overcapacities, bad consumer sentiment, and promotional activities across the whole e-com universe. However, we realigned our pricing strategy and leveraged our 21 years of experience and customer data when setting prices. Lastly, and Tim will go into more detail here, we are again comfortable with our balance sheet.... While we managed to reduce inventory heavily in the PAC segment to start fresh into the next season, we also increased our cash position for more financial flexibility going forward. So this was the intro from my side. Tim, now over to you for the financials.
Yeah, thanks, Andrés. So I would now like to share some details on the financial and non-financial KPIs of this third quarter of 2023 with you. In line with previous quarters, our active customer base increased steadily by 4%, to now almost 951,000 customers. This is primarily due to our successful localization efforts in Belgium and the Netherlands, where the number of new customers increased by 264% and 345%. Due to the increased number of new customers and the normalization of customer behavior, the repeat order rate declined by -2.5 percentage points. Having a repeat order rate of 70% assures us that we do have the right assortment, even during economically challenging times.
While we aim to increase the full bike share of total sales further, it stays important that most of our revenue still comes from the parts, accessories, and clothing business. As you then see, your customers several times per year. In addition, and as Andrés already mentioned, especially the parts business is significantly less discretionary driven, and sales can be partly viewed as being recurring, as they need to be replaced from time to time. In line with the repeat order rate, other active customer KPIs, like revenue and average number of orders per active customer, declined by 11 and 9%. That effect is driven by three factors. Firstly, if a new customer joins Bike24, that person is added to the active customer base. Also, he or she wasn't active the full 12 months, and therefore has a negative effect on the set of KPIs.
More new customers, therefore, break down the active customer KPIs. Secondly, due to the ongoing internationalization, the share of customers outside the DACH region increases, while the average number of orders per year from these customers lower. And thirdly, given the ongoing negative consumer sentiment in the DACH region and reduced spending for discretionary goods, the order pattern of our long-term customers in this region is currently negatively impacted. The average order value was only slightly down, as the higher share of full bike sales partly offset the current down trading in the PAC segment. Let's now focus on the top line performance and our two segments, full bike and PAC. The strategic focus on full bikes a couple of years ago now pays off. Due to the increased assortment and the focus on high-quality bikes, Bike24 was able to escape the consumer and market conditions.
As a reminder, the latest published market figures in Germany assume a decline of around 15%. Bike24 is actively gaining market shares here. In terms of PAC sales, revenue were down by -23%. Andrés already mentioned the discretionary part of our business, which suffers most during economic downturns. The parts subsegment was less affected by the apparel and accessories subsegment, such as air pumps, etc., were the most affected. The decline in these two categories was over 30%. On a more positive note, Bike24 was able to partly offset the negative sales impact of the PAC segment with the full bike segment. The growth of 26% in this segment, which was almost equally driven by both bio-bike as well as e-bikes. When looking at the different geographies, we posted a decline of -15% during the third quarter for the DACH markets.
In line with my comments during the previous earnings calls, the worsening consumer sentiment, especially in Germany, is the main pain point here. On the other hand, our localized markets, and within that, especially Belgium and the Netherlands, recorded +9% sales growth. The rest of the European economic area showed a decline of -29%, and the revenue in rest of world were down 52%. Similar to the developments in the previous quarters, the customers in the non-localized countries returning to local players again that weren't able to deliver during the pandemic-related boom. However, if you compare the results of the localized countries with those of the non-localized countries, it becomes clear once again how successful the expansion into France, Italy, Spain, and most recently, the Benelux region has been.
Let's now turn to the balance sheet and with that, inventory and cash, two positions that improved. Our total inventory figure decreased both on a year-over-year as well as on a quarter-over-quarter basis. Our procurement teams have done a very good job. Margin has increased for products where inventory is healthy in the market. At the same time, Bike24 increasingly reduce over capacities. The focus was on the PAC inventory of OEM brands such as Shimano, SRAM, RockShox, Schwalbe, or Continental. Full bike inventory was intentionally built up to be able to serve the customer with the largest brand portfolio in the market. I believe with the growth rates we show in this segment, this is more than justified.
This reduction in inventory, as well as improved gross margins, led to a positive operating cash flow of more than EUR 5 million and increased the company's cash position to almost EUR 17 million. This offers some flexibility for additional operational sourcing in case of improving trends. Overall, these developments confirm that we are on the right path to achieve our year-end inventory target of below EUR 80 million. Now let's take a look at profitability. When looking at the gross margin development, the trend of worsening margins versus the previous year finally reversed. Despite negative external headwinds, the adjustments in our pricing policy allowed us to achieve significant gross margin improvements due to fewer promotional activities. We expect this year-over-year positive trend to continue going into Q4. Again, our current focus is on profitability before growth.
Moving on, the development in personnel cost is partly misleading, and it is important to understand the details. Overall, we managed to decrease our headcount significantly by -14%, a huge effort and a huge success. Due to the rising salary costs on all levels and the decreasing sales, the personnel expenditures and percentage of revenue slightly increases. In total, we achieved an Adjusted EBITDA margin of 3.9%. This is not only an improvement versus the pre-pre-prior year quarter, but also a continuous improvement quarter by quarter since last year. So that's it for my side. Now, Andrés, back to you.
Thank you, Tim. I would now like to elaborate on our full year 2023 guidance, which we updated on October 25th, to a decline of -11%- -16%. We've mentioned it before already, but the whole cycling industry currently faces headwinds from two main areas. On one hand, the ongoing macroeconomic challenges that not only our industry, but almost every consumer goods retailer out there faces, seem to persist longer than originally thought. With that, consumers seem to postpone the purchase of non-discretionary goods or downtrade for a cheaper alternative. As Tim presented during his part, this is particularly obvious in our biggest segment, parts, accessories, and clothing, which is rather consumption-driven and thereby disproportionately affected by the current market situation. However, as already communicated, many purchases are postponed and might be caught up again later.
The second challenge is rather industry-specific, as we recently see increased difficulties of other market players, which are primarily driven by a lack of liquidity or an unprofitable business model. While we would, of course, benefit from consolidations in the medium term, bankruptcies among retailers could lead to short-term overcapacities and keep discounts higher for longer than originally expected. However, given our recent success in managing our margins, we expect to maintain our guidance corridor of -1%- +1% in Adjusted EBITDA margin guidance, given strict cost control and higher gross margins. Before moving to Q&A, I would like to point out our focus areas going forward. Until the end of the year and further, our focus will clearly remain on margins, and with that, the already mentioned strategy of managing profitability before growth.
That said, Bike24 will return being a growth company as soon as we see a steady normalization, both from a macroeconomic perspective as well as in the cycling market itself. With that, we will set a priority, a high priority on full price sales room, despite this quarter being highly promotional with events like Black Week, end of season sale, and others. We had these events last year already, but we'll set discounts more selective this time. Secondly, we will continue to execute on strict cost control through a full top-down cost center evaluation to eliminate recurring non-value-adding cost drivers. While we grew very fast during the pandemic, it's now the time to critically assess various costs that arose during this time, specifically regarding software, marketing, and others, and decide what is really helping the company.
Lastly, while we already put the company on a much more solid foundation, during this first quarter, we aim to continue with the success from the third quarter, which is ongoing improvements in inventory, cash position, and operating cash flow generation. Thank you now for the attention, and we are now open for questions.
Thank you so much for your presentation. We will now move on to our Q&A session. And for a dynamic conversation, we kindly ask you to ask your questions by person via the audio line. Therefore, please raise, click the Raise Your Hand button. If you're not able to speak freely, you can also place your questions in our chat box. And we already received the first hand from Mr. Kruse. Please go ahead.
Yeah. Hi, guys. Thanks for taking my question. Well, one question for Andrés, and then two for Tim. Andrés, you already highlighted sort of your view on Signa, but maybe you could outline a bit more what you're hearing from the market, maybe also some not public competitors, how they're faring. Would be really helpful if you just could shed some more light maybe on your assumptions there.
Yeah, thank you for the question. To be honest, I think there was a lot happened in the last weeks, but I think it's really, it's really early to comment on the direct impact on Bike24 and on the whole market. I see, yeah, I think there is also risks. Yeah, I mentioned before that in the short term, that we have or that we can see over capacities in the market. On the other hand, I see also opportunities because I think our broadment, our assortment is much broader, our product portfolio is much broader and wider than else, anyone else in the market.
I think we also serve to the customer, or, or we serve a slightly different customer group, a little bit more the enthusiasts, and they are looking more for the quality products we are offering. Yeah, that's maybe the... Well, that's not, that's not maybe, that's the answer I think on the, on your question.
Okay, thanks. And then two questions for Tim. You already mentioned that you want to improve margins further. On the other hand, you said you see promotional activity and maybe some costs, yeah, some pressure on prices again in Q4. What can we expect in terms of the gross profit margin looking at this quarter, in the fourth quarter?
Yeah. So it will not comparable to the Q3 quarter. As you know, in the history, there are a lot of events coming now, in November with the Black Friday, and also, during October, we have a so-called blowout sale for a specific part of the assortments. So that is, Q4 is a more promotional quarter, so we don't see any comparable margins like Q3. But what is for us important that we is, that we will see a continuous improvement, compared to the Q4 last year, and that is what we're working for.
Okay, perfect. Okay. And then, on free cash flow or cash flow in general, congrats on the positive free cash flow in Q3, first time this year. If you look at the cash balance, would be fair to assume that you end up with a similar level end of this year that you were in last year?
Not at the same level. So, overall, we will see also in Q4, decreasing inventory, that's for sure. Yeah, we will use Black Friday, and the coming days and months that are left in this year to really manage in detail what is the stock, what we would like to sell. That will... Yeah, we will see that we reach an inventory level below EUR 80 million. Overall, the cash balance sheet will be stable or slightly negative impacted until Q4, but with the EUR 17 million now end of Q3, I think we have enough flexibility also for the coming quarters.
Okay. Yeah, thanks a lot. Well, then all the best for the next month.
Thanks.
Wonderful. So, we received another question from Mr. Bloom. Please go ahead.
Hi, guys. Can you hear me?
We can hear you well.
Great. Thank you for taking the questions. I was wondering if you could maybe elaborate on your relationship with the banks and the bank syndicate, in relation to this very hard, difficult environment that you're in right now. How are you seeing this impacting your covenants that you have for the next quarters?
Yeah, sure. I think that we are in, yeah, in discussions. We have regular meetings with all the bank partners at least every month. But please have in mind that we have a track record of 24 years. We have a long-term relationship to each of the banks, and there are really positive talks and constructive talks. So, for sure, it is a risk also the current situation around Signa Sports United. Doesn't make it easier, yeah, to say, but we are really in good talks and in very real discussions with the banks.
All right, thank you. You spoke about in your last quarterly update that you had some margin goals that you had to follow on the EBITDA side. Would that entail that you also have to deliver a positive EBITDA margin for Q4, or can you comment on this element?
Yeah, we don't know, comment on the details really on the, on the financial governance, KPIs that we have. So, but I can assure you that Q3 was totally in line with what we agreed with the banks. And in Q4, now we will see what happened, and we are in advantage. I think that's very important that we are in good talks with the banks.
Great. Thank you for that.
Thank you.
That was all for me.
Thank you, Mr. Bloom, for your questions. We will now move on with Mr. Funke. Please go ahead with your question.
Do you hear me? Hello? Can you hear me?
Yeah, we can hear you.
Yes, sir. Thank you very much for taking my call, and I would like to follow up on the question before. Could you give a little bit more insight about the syndicate loan in a certain way? You have to repay, I think, on a quarterly basis, EUR 2 million, starting from first quarter 2024. If you are saying we are in really good talks with the bank, unfortunately, all companies which are in difficult situation have always, they say they are in good talks. That is not so much helping. Could you, in a certain way, because we are in such a difficult situation in the world market, and I believe very much in Bike24, and the main thing focus for us as investors, I think is at the moment, how you get through this debt situation.
So just to give us more insight on that.
Yeah, so I couldn't point out any really results of the discussion, so that's for me very difficult to comment on that. I could only say that we talking, and that we have understanding from the bank. And I think what's very important is that one of the financial covenants is our actual liquidity, and I think we have now EUR 70 million on the bank. Yeah, we added EUR 5 million during the last quarter. Yeah, reduced constantly the inventory position, so we're feeling very good also to manage to pay down as negotiated last year the debt. And I think that's yeah a positive start of the discussions. Yeah, but there are no specific results at the moment that we could report.
As soon as there is something to publish or to communicate, we will immediately communicate it through corporate news. Yeah, so fortunately-
Of course. But, but, but then I could ask myself, why do you have to discuss something? Because in the statement which you have published on the 17th of February, 2023, it's written there, you have to repay, you have a high—The margin will be changing, so, but why you are actually having very good talks with the banks?
So when the contract was made in February, of course, certain covenants were part of the contract, and back then, also not only our guidance, but also the situation was very different. And while the covenants weren't a problem for Q3, we're gonna discuss the covenants going forward, and we also discuss potential waivers.
Okay, I see. Thank you.
Thank you very much, Mr. Kruse. We received another question. Where do you see the biggest drivers in decreasing inventory further until year end? How did this go in October?
Yeah, as I really mentioned, very important for us is the Black Friday. That's coming end of November. Compared to last year, we will not discount really the broad assortment. We will do that very specific for only for products where we have over capacities. The last five days, there was a flash sale. Yeah, that's kind of, I would say, marketing measures that we do to get rid of, yeah, some over capacities that is left in our inventory.
And again, the flash sale was only on six different brands, right? So it's those brands we are in good relationships with. It's not on the whole assortment. Yeah, think about we have around 800 brands, so we discount very selectively.
All right. Thank you for answering, and we received another question from Mr. Spang. Please go ahead.
Yes, hi. I've just one question related to your gross margin. I'm wondering how you be able to increase your gross margin in this very tough environment. Can you, can you explain this?
Yeah, so, all credits to our, procurement department or, category management. I think, what we did together with this department is really managing in detail, and it's important that there are brands and products, where the stock in the market is very healthy. Yeah? And but you have, and that's a big part of brands where the fast movers, like Shimano, SRAM, where you have over capacities. So what's key in the actual situation is really to find, the right way and to manage really on detail and look at each product, at each SKU. So it's a lot of work, a lot of effort, but it works. Yeah. And that's the reason why the, last quarter was also successful.
I would like to point out our secret sauce again, because, like we said, sometimes or actually, we don't have any exclusive products-
Yes.
But thanks to the secret sauce, the customer knows if he or she orders until 3:00 P.M., and it's a small item, right? That's in our AutoStore system, it will be shipped the same day. So it's basically up to the customer to decide whether to order at Bike24 and have it within one or two working days, or order it somewhere else, probably at the same price or more expensive, and then wait for two weeks. But this is what we meant with selective discounting. Certain brands, especially the larger brands, there are still over capacities in the market, but for certain parts, there is significantly less supply in the market still. Yeah. And with those brands, we of course aim to increase the share of full price sales. Yeah.
Mm-hmm. And did I get you right, in the previous answer to Mr. Kruse, that you don't expect this, Gross Margin in Q4, or was it a misunderstanding?
Yeah, not-
So versus prior year, we expect an improvement, but we don't expect the 27% from this quarter, yeah? Because Q4 is highly promotional. So it will be a year-over-year improvement, but not a quarter-over-quarter improvement.
Yeah. Okay, thanks.
Thank you so much. Just a short reminder, if you have any open topics left, click the Raise Your Hand button or place your question in our chat box. We will go on with the question: Where do you currently see the biggest risk for Bike24?
Yeah, sure. I think, you already asked the question. The biggest risk is for sure that the refinancing, at the moment is, difficult, yeah, also due to the, negative headwind in the whole industry. Also the, yeah, the insolvency of Signa Sports United is not helping in the discussion. But again, yeah, so far, still we have really good conversation with the banks, and, that is, I think, still the biggest risk, for sure. Yeah.
All right. Thank you so much, and I guess we already spoken about the last question, but maybe we can clarify. Why are your full bike sales still growing by double digits? Do you just discount massively?
Maybe I can catch this question. So I think the first, the first reason of the double-digit growth rates in full bikes that we had. And some years ago that we started to, yeah, to offer, yeah, a bigger assortment than the years before. And I think it was the decision, especially in 2021, one of our initiatives or strategic initiatives for the IPO, that full bikes is a very strategic part. And now we have, yeah, almost 60 different full bike brands. Yeah, very impressive assortment in whole Europe. And that is, I think, the main reason. And we didn't get. We get, yeah, in August, we had some discounts, yeah, because it's naturally the sales season.
But on PAC it was more, and yeah, it's the main reason is our big assortment in full bikes that we had the double-digit growth rates there.
All right. Thank you so much. Maybe we received the last question in the meantime. When can you pay dividends?
Well, I think I can catch this one. I think everyone is afraid that right now we have, yeah, maybe our, our minds and our thoughts somewhere else than paying out cash again. In like two years ago, I remember we got a lot of criticism, mostly from American investors, why we don't use the cash we have and open five warehouses at the same time. Luckily, our conservative approach back then kind of proved us correct nowadays to keep cash together, and I, I think we all agree that it's not the right time to pay dividends in the next couple of years, right? To invest further into growth, first focus on profitability, and then, as Andrés already mentioned, return to being a growth company like the last 20 years.
If you exclude 2022, I guess many of the investors following right now know the chart we always present in meetings. Bike24 grew 19 years, every year, double digits on top line, with a double-digit EBITDA margin, and our medium-term aim is to return to those figures.
All right. Thank you. So therefore, we come to the end of today's earnings call. Thank you all for joining, listening, and for all your interesting questions. A big thank you all, as well to the gentlemen for the presentation and the time you took to answer all these questions. Should further questions arise at a later time, please feel free to contact the investor relations team or ask from Montega. So I wish you all a lovely week, and we'll hand over for some final remarks again to Mr. Verleger.
Yeah, thank you very much for joining and for hosting, and we are looking forward to welcome many of you, either in Frankfurt, end of the month at the Deutsches Eigenkapitalforum, or in London at Pennyhill Park, beginning of December. Thank you very much. Bye-bye.
Thank you. Bye-bye.