Welcome to a Pierce Group audiocast with teleconference Q3 2021. Throughout the call, all participants will be in listen-only mode. Today, I am pleased to present Henrik Zadig, CEO, and Tomas Ljunglöf, CFO. Please begin your meeting.
Thank you. Good morning, everyone, and very welcome to Pierce Q3 earnings call. I'm Henrik Zadig, the CEO, and with me here in the office, I have Tomas Ljunglöf, our CFO, and Niclas Olsson, our chief controller. Let's move straight to the agenda on page 3, please. I'll start by making a short introduction to Pierce and our market, and then we cover the Q3 highlights and a financial update, and then we conclude with a summary and Q&As. Let's move to page 4, please. Pierce is a European online leader within the motorcycle niche. We sell gear, parts, and accessories for motorcycles in 16 European markets, and 2/3 of our sales comes from outside the Nordics. What's unique about Pierce is our private brand products, which now represents 42% of the revenues in terms of last 12 months sales.
The company has a long-term positive financial trend. Q3 last 12 months, we have revenues of SEK 1.6 billion and an adjusted EBIT of SEK 91 million, slightly below 6% in margin. As we've been saying repeatedly, when you look at last year's numbers, it is important to remember that 2020 was fueled by strong revenue growth due to corona. We roughly estimate that the full year adjusted EBIT last year was impacted positively by around SEK 15 million from that, 15. In other words, we believe the SEK 97 million reported adjusted EBIT last year would have been around SEK 82 million without the pandemic effect. Page 5, please. We operate in a European market that is worth around SEK 100 billion with an online penetration of some 14% two years ago in 2019.
Like in other industries, there is an ongoing channel shift where sales is moving from physical stores to online stores. The online market is expected to grow by some 15% per year, driven by a much wider product selection, convenience, and a somewhat increasing base of motorcycle riders. We estimate that last year we had a 10% market share of the European online market. Let's move now to page 7, please, for the Q3 highlights. When we look at Q3, overall, the quarter was characterized by growing revenues despite a lot of COVID-related macro challenges. Let's start with the financials. In Q3, we report revenues that grow by 11% in local currencies, corresponding to a growth of 10% in reported numbers. The Offroad segment grew 10%, and the Onroad segment grew 15% in local currencies.
This is overall a bit lower than what we expected. If we extend the expected two years and compare Q3 this year with Q3 two years ago, 2019, the average annual growth, CAGR, in local currency was 14% in Q3. The pandemic keeps impacting us during the quarter in a number of ways. We still experience product availability issues and delays in the market due to production constraints with our suppliers, as well as ongoing disturbances within the global supply chain. More specifically, this quarter, we had less access to clearance deals, and we had delays in some of our planned private brand launches. Similar to the situation in Q2, we observed lower online traffic in the market. Customers spent somewhat less time online browsing around for different alternatives, but they were more buying prone when they did so.
For Pierce, this has resulted in a marginally lower traffic during the quarter, but that was compensated by higher conversion rates and higher AOV, which led to the top-line growth of 11%. Excuse me. The adjusted EBIT was weak and landed on SEK 3 million. This equals a margin of 0.7%, which is three percentage points lower than last year. This result was negatively impacted by SEK 9 million of higher container shipping costs from Asia versus last year. These container costs have now increased sixfold versus last year, so they are clearly a problem for us at the moment, and we'll come back to that. Moving to the operations, we continue to see good traction on our KPIs. The customer satisfaction as measured by Trustpilot, in fact, reached a new all-time high level for a single month in September.
This is a result of the investments we have made in better systems, upgraded processes, and a stronger customer value proposition. Good progress, but there is still a lot more to be done here to fine-tune the organization and way of working. When it comes to the assortment, another important strategic priority, this quarter we signed new strong external brands, including Oakley and FXR, and we look forward to adding their products to the assortment. Now, when we look forward, these COVID-related macro factors are challenging in the short term, but we believe they are of a transitional nature, and we remain confident in the underlying growth of the online market and the long-term potential.
Now, in the short term, and then I talk about the next couple of quarters, there is limited visibility and uncertainties regarding both the availability and online demand. We expect it to be challenging to deal with these uncertainties and the cost pressure coming from increasing shipping and raw material costs. During the Q3 , we saw only small signs of the industry as a whole beginning to increase prices vis-a-vis the end customers to compensate for these increased costs. One can think this is surprising. However, I believe this is explained by the fact that our industry is very fragmented. It is very fragmented on both the supplier side and the retail side. Still, our assessment is that over time, these cost increases in the industry will be transferred over to the customers.
To this effect, we are ourselves working very hard to try and mitigate these increasing costs as much as possible. For example, we are working on executing price increases, optimizing logistics, changing sourcing and purchasing strategies and routines, and adjusting campaign schedules, to mention a few actions. Now looking at the very near term, we are right now completing the preparations for the Black Week. This is that is the this year's most important campaign period. Given the uncertainty regarding the product availability on the market, which has been ongoing for quite some time, we have worked with an extra safety margin and built up the inventory to strengthen the customer offering as much as possible before the start of the campaign and the beginning of 2022.
We feel ready and look forward to welcoming the customers during the Black Week. However, at the same time, we are meeting high comps as we grew by 25% last year during the Q4 in local currencies. Page eight, please. When looking at the revenue growth for the last six quarters, there are a few things worth pointing out. The exceptional growth of 39% in the Q2 last year was driven by the lockdowns following the pandemic. In the Q3 last year, we suffered a bit from low stock levels as a result of the strong sales in the Q2 . As I mentioned, in the Q4 was a strong quarter with 25% growth on the back of a very successful Black Week campaign.
In Q3 this year, we grew 11%, but still we suffered from some product availability issues, in particular related to the lack of clearance deals that held back the growth somewhat. Page nine, please. As the pandemic distorts the recent figures, it can be useful to also look back two years and compare the quarterly growth versus 2019. When we do that, we see that the growth rate CAGR in local currencies during the Q1 was 19% and 17% in the Q1 . For Q3, the same CAGR is 14%, so it's a bit low in a historical perspective. As I mentioned, it was hampered by particularly low access to clearance deals and some delays on the private brand new launches side.
Year to date, the CAGR versus 2019 in local currencies is still 17% growth. Page 10, please. Looking at the operational KPIs, we are very pleased to see good progress. The base of active customers is growing 9% to 1.15 million active customers. Last year, the lockdowns drove a high number of new customers, while some slowdown this year was expected. The number of orders is up 6%, and the average order value is growing well due to a better mix and a lower share of clearance activities within the Onroad segment. Page eleven, please. The private brand sales is growing 17% on a last 12-month basis, and the customer satisfaction scores are stable on a respectable 4.2 out of 5 based on now over 100,000 reviews all over Europe.
In fact, as I mentioned, for the single month of September, we also hit an all-time high of 4.3 out of 5, which was very positive. We have worked a lot, and we are still working a lot to improve systems and automate and streamline processes to strengthen both the customer experience and scalability. It's good to see that is paying off. Page 12, please, and I'll hand over to our CFO, Tomas Ljunglöf.
Good morning, everyone. The cost for a container from Asia has almost sixfolded compared to Q3 of last year. In Q3 this year, the related cost of goods sold effect that affected gross margin negatively by slightly more than 2 percentage points versus Q3 of last year. So far, we have been able to forward only limited parts of these cost increases to the end customers through price increases. The increased shipping costs affect the P&L when the products are sold.
Since the majority of the products shipped during the last couple of months are still in inventory and have not been sold yet, and these were having high shipping fees or shipping costs to us, we foresee further increased negative cost of goods sold effects relating to this during the next couple of quarters. The future impact on the gross margin is, however, harder to foresee. Over time, we think that we will be able to forward these increases to the end customers. As always, there is a balance to be found between top-line growth and customer prices. The target is to maximize the profit at the variable cost in absolute numbers. Let's now move to the financial update on page 14, please. After a flat year-on-year revenue development in Q2, we saw an 11% growth in local currencies in Q3.
However, the Q3 growth was hampered by pandemic effects, both last year and this year. Last year, the growth was negatively affected by insufficient inventory levels relating to the very high growth of Q2 of last year. This year, the online traffic in our market was developing negatively, likely due to the released restrictions. Further, we had a hard time finding attractive clearance deals, due to a general delay in launches of new collections from external brands. The growth was driven by a higher conversion rate and also improved average order value. Also to some extent, if you take away the lack of clearance deals, then a better assortment. The main explanation for the decreased contribution margin in Q3 versus last year refers to these increased shipping costs from Asia of around SEK 9 million. Page 15, please.
In both Q3 and year-to-date, the main reasons for the decreased adjusted EBIT were the increased shipping and overhead costs. The latter relates to investments in the organization. These two effects have partly been compensated or balanced by increased contribution relating to the top-line growth. Page 16, please. Looking at the decreasing adjusted EBIT margin, it can be explained by the just mentioned two cost increases relating to shipping and to a lesser extent, the increased overhead costs. Page 17, please. When it comes to our two main segments, the picture is a bit different. Offroad Q3 margins were lowered by increased performance marketing costs on top of the higher shipping costs. Further, Offroad was a segment that was the most positively affected by the COVID-19 related effects last year.
If you look at the first three quarters of 2020, Offroad grew by around 30%, and that explains this year more modest growth of around 9% in local currencies. Page 18, please. Consequently, Onroad shows a better top-line growth than Offroad in both Q3 and year-to-date. In Q3, the Nordics on a year-on-year basis grew by 30%, while top line was flat outside the Nordics. An explanation for this large difference is that our assortment is better suited for the Nordics, and we're still building up the assortment for the markets outside the Nordics, including both private and external brands. As we have mentioned, we do have recently signed some popular external brands for the outside Nordic markets. We are moving in the right direction there, but there's still a difference.
The contribution margin was basically flat in Q3, despite the increased shipping costs, and this can be explained by large sell-out activities in Q3 of last year. When disclosing the financials for the segments, we do not include FX revaluations of the balance sheet since it would distort the analysis. These FX effects and the size of them per quarter are disclosed in the report, and we also disclose them in the appendix of this presentation. We do want to mention that these effects on the gross margin were positive by SEK 6 million in Q4 last year, and that relates to the vastly strengthened SEK during a short period at that time. That's important when looking at Q4. Page 19, please. Net working capital increased to SEK 200 million at end of Q3, and it mainly referred to increased inventory levels.
The inventory to sales ratio was higher than usual at the end of Q3, even if Q3 normally stands out a bit due to the fact that its just ahead of the Q4 campaign season. The reason why it stood out this time is the fact that we have worked with safety margins, when building up the stock, and that of course, relates to the uncertainties around product availability. The top line did not develop fully as predicted during Q3, and that increases the inventory levels. Further, the mix of the stock has not been optimal due to the lack of clearance deals. Page 20, please. Operating cash flow last 12 months was minus SEK 20 million, and the main driver for this is the increased net working capital that I just described on the previous page.
Let's move on to page 21. Net debt at the end of Q3 was SEK 105 million, and around a third of our SEK 300 million credit facility was utilized. Group equity was more than SEK 400 million, and we deem our both cash and equity position to be strong. I will now hand back to Henrik for a wrap-up. Page 23, please.
Okay. To conclude and wrap up our Q3 report. In the Q3 , we have net revenue growth of 11% in local currencies. The adjusted EBIT of SEK 3 million was weak and the profit was impacted negatively by, in particular, higher shipping costs versus last year. If you look at the last 12 months, the company grows 13% in local currencies with an EBIT of SEK 91 million on an adjusted EBIT basis. The company is financially strong with a robust cash and equity positions, and our operational KPIs are developing well. The number of active customers is growing and the number of orders is growing, the average order value is growing. Also in September, we had our best customer satisfaction scores ever for one single month. If we look forward, there is limited visibility with continued strong uncertainties in the short term.
We expect continued challenges regarding increasing container and raw material costs, and uncertainty regarding the product availability and online demand. However, we believe that these effects are transitional in nature, and we are taking a lot of measures ourselves to mitigate this as much as possible. We know that motorcycle riding is a passion, and it's a prioritized activity with our customers. Since the start of the pandemic, many more people have discovered e-commerce, and I'm confident that our position with a broad assortment, with low prices and attractive campaigns based on a scalable platform is a great position to have. All in all, there is continuous good opportunity for profitable growth, and we feel confident with the long-term course. Page 24, please. To finish off, the focus areas going forward.
Given the situation, our main focus is and needs to be on the here and now. In the short term, we are finalizing the preparations for the upcoming Black Week and the Christmas campaigns, and we feel ready. At the same time, as I mentioned, we are meeting high comps as we grew by 25% last year during the Q4. Of course, a lot of focus is now going towards also navigating the pandemic effects. We're working to secure availability, increase prices in line with what the market can tolerate, optimize logistics, adjust sourcing strategies and tactics, et cetera, the number of activities in play now in the medium to long term, the focus is to execute on the long-term growth strategy. We continue to strengthen the On-road assortment.
Growing within Onroad is a strategic priority for us, and the assortment is an important lever for that. Driving up scalability and improving the customer experience are key drivers for our long-term success. We have come quite a way here, but to be honest, we still have a lot of work left to streamline and automate process, and fine-tune the organization. That is also very much part of our plans. That concludes the presentation. Operator, let's move to page 25 and open up for Q&As.
Thank you. If you do wish to ask an audio question, please press zero one on your telephone keypad. If you wish to withdraw your question, you may do so by pressing zero-two to cancel. Our first question is from Daniel Ovin of Nordea. Please go ahead.
Yes, good morning, Henrik and Tomas, and thank you for taking my questions. First question on the inventory position going now into the Cyber Week and also then Christmas. It seems like it's up quite a lot if you compare to sales. Would you say that you feel confident that you have the products in inventory now for at least Cyber Week? Or will you also be dependent on getting further inbound products ahead of Christmas? Maybe you can talk a little bit about the inventory situation for Q4.
Yes. We have, as we also said in the Q2 presentation, we work with safety margins. We have filled the stock, and it's true what you're saying, and you can actually see that on page 34 in the appendix because there you have the physical stock and goods in transit. Obviously the physical stock is the key thing here in the very short term. I feel confident with the total stock level, and we are not depending upon any major additional stock inflow after the end of Q3. Then again, the stock, as I mentioned, you always wish for more, right? We have had the problems with the clearance here in Q3.
It's not perfect, but it's sizable and I'm a lot more happy to be in this situation compared to a situation where the stock would not have grown or much less than it had grown than it would have been felt a lot more shaky ahead of Black Week. All in all, satisfactory.
Great. Thank you. Also on the overall market. I interpret it as it's been relatively weak versus last year in Q3, talking about traffic being down year-over-year. Can you say anything about the start to Q4? Do you see the same picture? Is it as tough still or is there some kind of improvement there? Maybe you can talk a little bit about the overall environment here.
Yeah, I mean, overall in Q3, as we mentioned, the traffic was down a little bit, few percentage points overall in the market. There are no changes overall as we go into the first weeks of Q4. However, that's on the market level overall. I'm not mentioning anything about sort of Pierce performance in Q4. I think what's important to realize is that Q4 for everyone in this market, including Pierce , will be determined by what happens during the Black Week and the Christmas campaign. That is when the big volumes are shifted. That's what matters.
Okay, great. Just one question also on the shipping cost here, just to see, try to understand here with what lag you operate, et cetera. If shipping costs were to stay at the current level, would you still say that the shipping cost to sales ratio would be up also in the beginning of next year? Or, you know, if shipping costs are flat here, when would you still see that cost ratio starting to flatten out? Just to understand a bit of the lag here.
Yes. That is, it's all other things equal, as we said, and why didn't I say it, but we have a delay here. The delay is around 3 months-4 months, right? I would say that that's from a purely mathematical perspective the ratio in Q4 is to increase, right? Because we have this delay. It should, all other things equal, given a flat fee development, start to flatten out in Q1, Q2. It should flatten out in Q1. It also depends how we play it, right? Because this refers to private brands, right?
We could play around and try to push for more external brands, et cetera. That would affect, of course, the cost of goods sold. You have the other side of the coin, which is going to be customer end prices. I said that over time, we believe that we should be able to push this out. Any other scenario would be very strange.
Okay.
The timing of that. Yeah.
Yeah. Okay. Just one question also on the competitive environment, and you're talking about the competitor not really raising prices yet and also a fragmented industry. Do you think that this, what's happening now would speed up the eventual shakeout of smaller competitors in the industry? Have you started to see any signs of that the competitors are going out of business, anything of those kind of signs?
We don't see any big signs of that, competitors going out of business yet. I think it's clear the magnitude we are talking about here in terms of these pricing and the freight increases. It will be very difficult to sustain that business if you are a super small player unless you also raise the prices. I think all economic laws and all logic, common sense would say that everyone will need to increase the prices sooner rather than later. I think the fact that a lot of the competitors, that it is a very fragmented industry, there are a lot of small players here who you know may be less sophisticated. I think it takes time for everyone to realize and take the right actions.
In the online world, there's a lot of price transparency, so, customers hunt for a good deal. They have, of course, a number of players to choose from. Over time, I am confident that the industry as a whole, including the competitors, will increase the prices. The timing of that is uncertain.
Okay, perfect. That's all my questions. Thank you very much.
Thank you.
Thank you. Our next question is from Carl Deijenberg of Carnegie. Please go ahead.
Thank you very much. Good morning, Henrik and Tomas. First, a follow-up question on Daniel's question there on the sort of overall pricing environment here in Q3. You're mentioning marginal price adjustments in Q3 and due to the fragmentation and physical competitors lagging. Have you seen that sort of improving here going into Q4 so far? What are you seeing from the two stronger online competitors that you have in Central Europe? Have they started to adjust prices or is it quite uniform for them as well?
We don't see any major changes yet in Europe when it comes to prices. Remember, now everyone is moving into Black Week. I think everyone is trying to gear up for a good position and to be able to ship volumes during that period. I, you know, I'm not sure everyone there in the industry is thinking about price increase in the next sort of 10 days. I think that's probably gonna be the other way around.
Yeah, fair enough.
After that, I would expect to see if I were to guess, right? I can only speculate. I would expect price increases to start to show up.
Yeah. Okay, clear. A follow-up on the inventory situation, which we discussed previously as well on the working capital here. I mean, you seem quite satisfied on the inventory side here going into sort of high season Q4 and shopping periods here. I'm just wondering, is there any particular tilt in your inventory today? Because it seems that it's been easier for you to source, of course, your private brand products versus your external brands. Are you lacking some specific categories on the external side or do you feel that it's sort of well-balanced, externally vis-a-vis private brands, going into Q4?
I mean, I think overall, when we look at overall, we are satisfied with the inventory position for as we go into the campaign period. On the private brand side, I would say the situation is very good. On the external brand side, I would say the position is good. It is relatively stronger on the private brand side than on the external brand side. On the external brand side, as I mentioned, it's good. There are certain pockets, and I wouldn't say it's in a specific category, certain pockets from certain brands, certain pockets of products from certain brands and that where we wish we would have had a bit more. Again, overall, the situation on the external brand side is good. We're gonna have a good offer to the market here as we open up for the Black Week period.
Okay, very well. My final question for now on the clearance deals here. I mean, clearly had a negative impact during Q3, both on your growth profile, but then particularly on the margins. I'm just thinking here, have that sort of situation improved here going into Q4 and you said you mentioned in the report that clearance deals has primarily been an effect in the Offroad segment. Is that not an issue at all within Onroad, or is it just sort of less material within Onroad?
Yeah, in particular for the Offroad segment, that's where it's noted the most. I think going forward now, we do think that there are continued sort of restrictions in the next couple of quarters on the clearance deals overall, due to the less availability of products in the market. However, from our perspective, also given the fact that in Q3, we didn't have as many clearance activities as we would have expected. Some of them were delayed, and they are now coming into the Q4 . That should help a bit and compensate a bit for that.
Okay, very well. That was all my questions. Thank you very much.
Thank you. Our next question is from Niklas Ekman of Carnegie. Please go ahead.
Thank you. Just a question on the on-road market and this quite significant difference between the Nordics and Europe. Is this all company specific or have you noted any tangible differences in the market? I mean, is the continental European on-road market, is that still lagging? You're not seeing any strong recovery there or can you elaborate a little bit more? Because a 30% gap here, that seems to be quite significant.
Yeah, it is a difference, absolutely. No, I wouldn't say all of it is company dependent. I mean, Tomas talked a bit about what's company specific, that is the assortment, right? We feel we have come a much longer way. We have come further when it comes to developing our assortment for Northern Europe, both from the private brand side and on the external brand side. Now, what we have been working on and what we have announced also publicly over the last sort of year, we have been able to sign a number of new brands that are big and popular also in Southern Europe, including Dainese, Shark, AGV, et cetera, as we communicate to those in different forums. Those are important.
They are spot on targeted for the Southern European market. You know, some of those we have launched, others are in the process of being launched, right? I expect these to gain a more important part of our portfolio as the months pass, right? When it comes to the private brand side, we have a number of products geared up. In fact, we were supposed to launch a few in the Q3 , but they were delayed due to the disturbances. But they should come here, if not in the Q4 , they will come in the Q1 . These are products that are geared for the Southern European market. Those are the sort of company specific. Overall, yeah, I mean, you can speculate.
We are doing a bit better right now in Northern Europe, in Nordics, than we are doing in Southern Europe. I think overall, on the traffic side, we see overall in the market better traction in the Nordics in terms of growth levels than what we're seeing overall in the industry in Southern Europe. Whether that's pandemic-related or not, it's difficult to speculate, but that's what we're seeing, and that's also reflected in our numbers.
Thank you. That's a very good answer. Thank you for taking my question.
Thank you. Just as a reminder, if you wish to ask a question, please press zero one on your telephone keypad. There'll be a brief pause while any further questions are being registered. There are no further questions, so I'll hand back over to our speakers.
Okay. I'd say thank you very much for joining the Q3 earnings call. We'll hear from each other in February as we release the Q4 report. Thank you very much and have a good rest of the day.