Earnings Call: Q1 2021

May 26, 2021

Let's move to Page 2, please. Good morning, everyone, and welcome to Peer's first earnings call following our IPO in late March. I'm Henrik Zadig. I've been the CEO since 2016 after spending some 15 years abroad in various American companies. With me in the room, I have Thomas Junglev. Good morning, everybody. I'm Thomas Junglev, and I've been with the company as the CFO since basically almost exactly 3 years. And I have a long experience as a CFO of both listed companies and private equity owned companies. Page 3, please. On the agenda today, since this is our first ever earnings call, I'll start by making a short introduction to peers and our market, And then I'll move into the Q1 highlights. Thomas will then give a financial update, and then we have a summary and Q and As. Page 4, please. Pier's is an e commerce company, which has become a European online leader within the motorcycle niche. We are a pan European company. We have local sites in 16 markets, and twothree of our sales is coming from outside the Nordics. And we sell everything that a motorcycle rider needs, except for the actual bike. So we focus strongly on gear, parts and accessories. What's unique about peers is our private brands, something we've been working on since the company was founded in 2,008, and they represented 40% of our revenues last year. The company has historically had a strong focus on revenue growth to build a customer base and to build a strong position in the European market. However, in the end of 2019, in the last quarter, We adjusted the strategy to focus on improving the profitability and improving the cash flow alongside a more balanced revenue growth. As you can see to the bottom left, this strategy adjustment has had a positive effect on adjusted EBIT, which continues into Q1, and I will come back to that. Page 5, please. The customers know us through 1 of our 3 branded online niche stores, one for each segment or niche, That is 24 MX for the off road riders, XL motor for the on road riders and SleddStore for the snowmobile riders. But internally, we have designed and built the company to be scalable. So for example, we have a centralized and international organization located in Sweden, Poland and Spain, who work across all the three stores and all the markets. Similarly, the IT setup, The warehouse setup and all the processes are the same for the 3 stores and markets, and we do this to be as scalable as possible. This design and setup should also allow us to add more stores or vertical as and when the timing is right. Page 6, please. We operate in a European market that is estimated to be worth SEK 100,000,000,000 In total, if we include what is sold in physical stores and online stores. The online market was sized at SEK13 1,000,000,000 in 2019. And just like what we're seeing in other industries and categories, there is an ongoing channel shift where sales is moving from physical stores to online stores. The online market is expected to grow by 15% per year, so effectively double in size to €27,000,000,000 by 2024. In 2020, we estimate peers had a 10% market share of the European online market. So that was a very short introduction to peers and our market. Let's now move to Page 8 for the Q1 highlights. On Page 8, In Q1, we see strong revenue growth. We report 20% growth versus the Q1 last year. In local currencies, the growth was 25%. Adjusted EBIT grows strongly from €2,000,000 last year to €18,000,000 this year. This equals a margin of 4.9%, up from 0.6% last year. The profitability improvement is driven by Strong revenue performance in both our main segments, Off Road and On Road, improved gross margin and good cost control and scalability effects on the overhead costs. Since a while, we focused on strengthening the assortment, which, of course, is a key component of our customer value proposition. And during the Q1, we see good progress. We see revenues from private brands growing 36% to 157,000,000 and we'll see growth coming from both existing and new products that we launched during the quarter. On external brands, We see good momentum in signing up new suppliers to our On Road business, which is a less mature segment for us. During the quarter, we have signed agreements with a number of brands, including, for example, Shark, Nolan, Ram, Turtle Wax, to name a few, and more brands are on the way in. And finally, the financial position of the company has strengthened considerably, thanks to a new external financing structure we put in place along in connection with the IPO. Page 9, please. When you look at the revenue and the growth for the last six quarters, there are a few things that stand out. First, the last two quarters show a local growth show a growth in local currencies of 25%. You also noticed the exceptional growth in the Q2 last year, which was driven by the COVID-nineteen effects and also internal actions to stimulate short term revenue growth and cash generation. In Q3 last year, we then suffered from low stock levels as a result of the strong sales in the Q2 and general low product availability in the market. And the strong second quarter sales last It, of course, makes the comps challenging for this year, and I will come back to that point. Page 10, please. If we look at the operational KPIs, we see that the base of active customers is growing well. At the end of the Q1, we had almost 1,200,000 active up 30% on a last 12 month basis. We also see good order growth and stable average order values. Page 11, please. As mentioned, Red Private Brands sales is growing strongly by 36% in the Q1, and that gives an LTM growth for private brands of 29%. The customer satisfaction Scores, as measured by Trustpilot, are stable on a very respectable 4.2 out of 5. And we feel good that we've been able to keep the satisfaction levels stable at this good level despite all the COVID-nineteen turbulence and the fact that we moved to our new e commerce platform last year. Let's now move to Page 13, and I'll hand over to Thomas Junglef, our CFO, to go through the financials in more detail. Just as in Q4 reported growth was 20% and growth in local currencies was 25%. As Henrik has already mentioned, adjusted EBIT grew from €2,000,000 in Q1 last year to €18,000,000 To a very large extent, the improved adjusted EBIT and absolute numbers can be explained by the combination of top line growth and improved margins after variable costs. Page 14, please. The adjusted EBIT margin increased from slightly less than 1 percent to almost 5% in Q1 2021. As disclosed on this slide, the improvement can mainly be explained by the improved overhead to top line ratio related to positive scalability effects and an improved gross margin. The latter refers to a combination of favorable FX developments, an increased private branch share and a revised price strategy launched in Q4 last year. The favorable FX development refers to the weakened U. S. Dollar versus the euro that took place mid year 2020. And this development helps the gross margin since we only have cash flows out cash outflows in U. S. Dollar related stock purchases and no revenues of cash inflows in dollars. The P and L effect comes with a bit of a delay since it affects P and L when the purchase items are being sold. When it comes to the total FX in absolute terms in Q1 last year sorry, Q1 this year versus last year. It was slightly negative this year, mainly due to the weaker euro, which has lowered the top line versus last year. And this, to some extent, was compensated by the measured positive FX effect on gross margin And further some other positive effects related to costs that we do have in euro and zloty, and those currencies have become weaker. Page 15, please. As Henrik mentioned at the beginning of this presentation, we made a slight strategy adjustment late 2019 to focus more upon profitability and positive cash flows. That, in combination with positive related Corona effects in Q2 2020 made the rolling 12 months adjusted EBIT margin take a leap in that quarter. And since then, the adjusted EBIT margin has continued to increase. And as you can see on this slide, we ended up at 7.2% on a rolling 12 month basis in Q1 2021. The margin after variable cost have been stable throughout this period. It is the ratio between overhead cost and net sales that has developed favorably over time. And that is relating to scalability effects. And hence, the latter that is the driver for the the main driver for the improved EBIT margin. Page 16, please. As also mentioned by Henrik, both main segments that would be Off Road and On Road performed well in the quarter. We had good top line growth, and we also had good variable margin developments in both segments. Page 17, please. On this slide, the network and capital developments are presented. And as you can see, Those have been stable, both in absolute terms and in relation to last 12 months' revenues during the last four quarters. However, We did a large improvement in Q2 2020, and that was mainly related to the positive related corona effects and then driving sales then and pushing inventory down. And since then, we've been able to keep it on that level. Page 18, please. We're looking at the cash conversion, which was 119% during the last 12 months. The item that sticks out is the net working capital I just mentioned. Hence, euros 65,000,000 in net working capital compared to a year ago, despite the top line growth. Page 19, please. On this slide, it's a bit of a busy slide, but we have encircled the 3 most interesting numbers in the right hand column. And they show how the End of Q1 numbers would have looked if all IPO related transactions would have been cleared by then. And as you can see, the net debt would then have been €70,000,000 at quarterend, €70,000,000 And this implies an EBITDA leverage of 0.5 times. And as you can see on the last line, the equity position has improved considerably, thanks to the IPO. And we had a group equity of EUR 414,000,000 end of Q1. And to summarize then, Peer's financial position after the IPO is solid. Now we're going to move on to Page 21. So on Page 21, let me summarize the Q1, and see if he works about Q2. So in Q1, we had a very strong Q1 with Good growth in revenues, in profits and the number of customers. We see that our position in Off Road strengthened even further, particularly in Central and Southern Europe. In the On Road segment, we saw growth picking up, and we have good momentum in attracting new external brands, which is very important to make XLMOTO even more competitive as a store all over Europe. We saw that our private brand business developed well with strong growth on both new and existing products. Let me then also, as I said, say a few words about the Q2. First, just to manage expectations. We do not plan to provide mid quarter updates on sales and profits regularly going forward. But since we are reporting so late in a quarter, which is exceptional in many ways and where the comps are extraordinary given the COVID-nineteen breakout last year, we will make an exception and do so now. So when we look at the Q2, I should Note a few things. First, the business is still impacted by the pandemic. For example, we see lower product availability in the market. We see some delays due to container shortages, and we have seen in the Q1 continued lockdowns, which reduced the average rider activity level. Still, there are lots of uncertainties in the business, which makes sales planning harder than normal. 2nd, as I mentioned, we faced challenging comps given the exceptional growth in the Q2 last year. And so far in the quarter, in the Q2 than this year, when we compare to 7 weeks in April May last year, when we grew by almost 50% versus 39% for the full second quarter. We see that the Profit after variable costs in absolute numbers is this year on the same level as last year, while the net revenues in local currencies are marginally lower. Again, I want to stress that this is what we're seeing so far in Q2. It is not a forecast or a projection. We continue to be very confident with the underlying growth of the business and the long term focus. Our customer offering is stronger than ever, And it's getting even stronger as we are launching new brands, launching new private brand products and that we are sharpening the customer experience. Page 22, please. So let me close by reminding you about the financial targets for the medium to long term. We target an adjusted EBIT of around 8%. We target revenue growth of 15% to 20% per annum on average and over time. And when it comes to the capital structure, we target a net debt that does not exceed 2x EBITDA. And when it comes to dividend policy, we expect we'll invest the surplus cash back into growth initiatives, of which there are plenty. To achieve that, we are working on 5 pillars. We want to leverage the tailwind from The physical to the online channel shift that is ongoing, and we want to make sure we take our fair share of the 15% channel shift that is projected to happen. We strengthened the assortment. We focused particularly on attracting new brands for XLMOTO to make sure that the XLMOTO business becomes even more competitive all over Europe. And we are focusing on growing our private brands. We do have a very broad assortment already, and we are working on a long pipeline of new products that we'll bring to the market in the months and the quarters to come. And we focus a lot on sharpening the customer experience, Both the online and the overall service experience, we have come a long way, and I feel good about our customer satisfaction scores, the 4.2 out of 5, but we still have more to do as a company in this area. And we focus a lot on driving economies scaling operations. And here, we have seen good traction over the last 18 months, but we believe there are more efficiencies to capture as we grow and scale the business. So that would conclude our presentation. So operator, let's move to Page 3 and open up for Q and A. Thank Our first question comes from the line of Daniel O'Vin of Nordea. Please go ahead. Your line is open. Yes. Good morning, Henrik and Thomas, and congratulations on a good first quarter you reported here today. First question is on Q2 and what you're seeing there so far. And I noticed that you talk about Very difficult comps in April May where you grew 50% last year. But then you talk about Q2 last year when you grew 39% overall. So that suggests then, according to my calculation, that you in here should see significantly easier comparables. And I just wonder if you can confirm that and talk a little bit about what you expect for June then. Yes. I mean, that's a mathematical fact. If you grow by 50% during a certain period and the whole period drove by 39%. By definition, the growth rates needs to come down. Otherwise, the equation is not going to solve itself. I just want to add, however, that it's not the growth is not evenly distributed per month exactly, evenly distributed. And it goes closed down a little bit in June versus April, May, then start to get hot in Southern Europe. But that is true. So the comps further on in the quarter will be easier. Okay. And then also on the Gross margin. So it's quite a nice uplift versus last year. And you mentioned a few different drivers there. You talked about FX shipping costs, etcetera. Can you perhaps give some indication on, if not an exact number, at least the size of The drivers, which were the most important ones in the small gross margin operation that we saw this quarter? It's not so easy to judge the effect of the FX because, as I mentioned, there is a delay involved there. And it depends when this stuff was bought to what exchange rate moves all the time And then when we put it on the P and L effect, it has a positive effect there. But roughly, we estimate the U. S. Dollar to euro effect to be slightly more than 1 percentage point. Okay. Perfect. That's very helpful. Dan, just final question here, if I may, also on the profit after variable costs. So you saw quite good The support there almost 200 or around 200 basis points lower than same period last year. And you also mentioned here leverage, Good cost control, etcetera. But same question here. Maybe can you quantify this? Is this mainly through to That you had any particular cost savings versus last year? Or is it mainly just a leverage effect we see here on the profit on the overhead costs? It's a combination of various things here. As we write in the report, we did have a restructuring program going on in the winter of 'nineteen, 'twenty then. And the full effect of that cost program was achieved in Q2. So and I would also like to add that the overhead costs are, to some extent, variable. What we do put in the variable sales and distribution cost is 100% variable, but there is some volume effects. I mean, for example, the warehouse costs. So we got the full effect of the savings in Q2 last year. And obviously, we have received the full effect of that also now. But what we did during last year was that, I mean, things went very well, and we were slowly but surely building up the cost base. And as I also remember clearly that I said in the IPO process, the enormous improvement that we did see on a year on year basis. Hence, overhead costs moving from 19% we're of net rolling it down to 14.5 percent, 20 percent over 20 19 percent, that will not happen again, so to say. But over time, the clear target here is to reduce the overhead costs versus net revenue, thanks to the scalability effects. But if you look at a single quarter like this and compare it to Q1 last year, there are the fact that I just mentioned that we did do some cuts there that has full effect in Q2. We have slowly but surely started to build it up a little bit. We think that given the top line development. We were a little bit understaffed in some departments. But then we have also clearly made have positive scalability effects in certain departments like customer service, finance, etcetera. And then just a final comment that we were also a little bit helped here by the FX, as I mentioned, in slot and euro. Okay, perfect. That's great. Thank you very much for answering my questions. Thank you. And our next question comes from the line of Nicholas Beckmann of Carnegie. Please go ahead. Your line is open. Thank you. Just a couple of questions, if I may. Firstly, if I can come back on the Q2 guidance you're providing here. Obviously, comparisons were particularly tough in the first And still your earnings were flat. Is it safe to assume that, that means also that you should be able to at least We reached the SEK 44,000,000 in adjusted EBIT that you reported last year. Is there anything in particular in terms of the earnings that we should keep in mind For the second half of Q2? That is very good that you asked that question because Perhaps I don't know whether we were a bit unclear here, but just to reemphasize then, what is flat is the profit after variable cost. That is what's flat, not the earnings, the bottom line, right, not the adjusted EBIT. And We did have an increase, as I just outlined here, from if you take away the depreciation and amortization, the overhead costs went up from EUR55 1,000,000 to EUR58 1,000,000. And as I also mentioned here, we do we will not be able to repeat the cap that we so clearly did between 2019, right? Is that clear? So it's the profit after variable costs that was flat. Okay. Okay. So basically, you're not guiding for higher earnings year over year, not at this point at least? We're not guiding anything. We're just telling you how things looks now. Yes. I think it's important. We are not providing a projection here. We have said what as what we have seen so far in terms of our profit after variable costs during the 1st 7 weeks of April May since this is a very exceptional quarter. Very good. Thank you. And you mentioned stock shortages here. Is this something that had a material impact and will continue To impact? And also, are you seeing tangible price inflation from suppliers? And obviously, freight rates are But is there a general price inflation that you're seeing at the moment? We don't see any price inflation yet. But obviously, we are keeping the eye on the market and the raw material prices like everyone else, and it's clear that the raw material prices are going up, steel prices, for example. So at some stage, That may be impacting our product assortments as well or our purchases as well, but not yet. And when it comes to stock shortages, yes, we do see stock shortages. I wouldn't say it's general and it's not Super material overall, but for certain categories, certain collections with our external brands, for example, we see lower product availability in the market. There was, in general, I think we see for many of our suppliers, a reduction in volume production last year, and that is still hanging on there. So there is less products available in the market that we would like to see. And we also see some delays, both in terms of external brands and internal brands. But is it I wouldn't say it's super material, but it's impacting here and there and it adds up a bit. Okay. And I'm curious here in general also about on road improving here. I mean during the pandemic, you've seen very good growth in off road, but on road has been struggling a little bit. And now you see growth on a par for both business areas. So it seems to suggest a clear pickup in the on road segment. What is behind it? I assume that the Rider activity level is still low, as you said, in your statement here. So what's behind the improvement in On Road? Well, I think there's Couple of things. One is we did make a redirect in the Q1 last year of a business we had acquired, Moto Bikers, that we integrated into XLMOTO and that made sort of as we made that integration, we lost some volumes last year and that makes sort of the comps a bit easier this year. I think that's one driver. I think the second one is that our assortment is getting better. We have been working quite a bit on strengthening the assortment, both our private brand assortment and the external brand assortment on the for the OXO motor business. And as I mentioned, we had a number of brands that were added. That, of course, strengthened the overall customer value proposition. And we become a more credible and competitive player in the XLMOTO, it's we're far from done, I would say. There's a lot more to be done in terms of making the XLMOTO really the number one business in the whole of Europe. But I think this quarter shows that there is that we're going in the right direction. Very good. And a final more detailed question here maybe on the financial expenses. You had net financial expenses last year of SEK 73,000,000. It's still high here at $14,000,000 in Q1, but you obviously raised cash flow. You removed the shareholder loan in Q1. What roughly will be the new net interest rate kind of on a quarterly basis? We write that in the report and we say that the running interest costs after the payback of all these quite Large and expensive loans is estimated to be a couple of 1,000,000 per quarter. And that's the running cost for the interest then. And then on top of that, we will potentially have both positive and negative devaluations just of certain assets that is booked on the financial debt. But that over time, that kind of goes to 0 then. And a few million, that's like 3,000,000, 4,000,000? Roughly, yes. Okay, perfect. Thank you so much for taking my questions. Thank you. Thank you. We currently have one further question in the queue. And that next question comes from the line of Karl Johan Burke of Carnegie Investment Bank. So two questions From my side here, first of all, on the private label sales here in Q1, looking here at off road, roughly you grew roughly revenues Like SEK 40,000,000 year on year, but where I see that on road is or that private label is really driving roughly SEK 22,000,000 of these. So quite a Large growth here year on year in private label, particularly then in the off road segment. Could you say anything here? So is there any particular brand in the private label portfolio? You also talked about this Raven Verve collection here in Q1. And are there any sort of product categories in private label that is driving growth here in Q1? We see growth across a number of our brands. We have 11 brands, private brands in total, not all of them for the off road business. But when it comes So the off road market, we see very good growth on RAVEN, which is a brand for jerseys and helmets, etcetera. And we launched a new collection last year that is still doing really, really well. The Raven Verb collection was launched very end towards the very end of the Q1. So the impact there is going to be smaller in the Q1, but we should expect more from that in the quarters to come. Okay, perfect. And also a follow-up question here on Off Road and more on the revenue by geography here. It seems that the majority of growth is driven So countries outside the Nordics here in Q1, are there any countries that you want to sort of highlight that are performing Above expectations and below expectations. And maybe also if you could comment a bit on on road development by country. I guess that Could vary quite significantly here given the differences in lockdowns in between different European countries. Yes, it is a difficult quarter given all the lockdowns, right? But in general, we are, as you say, performing on the off road a lot better outside Nordics than we are in the Nordics. And I think there are a couple of reasons for that. One is we had a sort of long Winter here, which, of course, impacts the riding activity on the Off Road of our business with more favorable weather in Central and Southern Europe, so that impacts. And also, we have a much we have a very high market share in Nordics. So I think the growth opportunity in Europe, where also the market is a lot bigger, is more substantial. And I think we're seeing some of that here in this Q1. In terms of particular markets, I don't want to go into that level of detail at this stage. Okay. I understand. Thank you very much. That was all from me. Okay. Thank you. Thank you. And as there are no further questions on the phone, so I'll hand back to our speakers. Okay. With that, I say thank you, everyone, for listening in to our first ever earnings call. And with the next report we have on the 25th August. That will be the Q2 numbers, and I welcome you all back to that meeting. Thank you very much everyone. Thank you.