Let's move to page two, please. Good morning, everyone, and welcome to Pierce'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 Tomas Ljunglöf.
Good morning, everybody. I'm Tomas Ljunglöf. I've been with the company as a CFO since basically almost exactly three years. I have a long experience as a CFO, both listed companies and private companies.
Page three, please. On the agenda today, since this is our first ever earnings call, I'll start by making a short introduction to Pierce and our market, then I'll move into the Q1 highlights. Tomas will then give a financial update, and then we have a summary and Q&As. Page four, please. Pierce 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 two-thirds of our sales is coming from outside the Nordics. We sell everything that a motorcycle rider needs except for the actual bike. We focus strongly on gear, parts, and accessories. What's unique about Pierce is our private brands, something we've been working on since the company was founded in 2008, 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. 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 five, please. The customers know us through one of our three branded online niche stores, one for each segment or niche. That is 24MX for the off-road riders, XLMOTO for the on-road riders, and Sledstore for the snowmobile riders. But internally, we have designed and built the company to be scalable.
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 three 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 six, please. We operate in a European market that is estimated to be worth SEK 100 billion in total if we include what is sold in physical stores and online stores. The online market was sized at SEK 13 billion 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, effectively doubling size to SEK 27 billion by 2024. In 2020, we estimate Pierce had a 10% market share of the European online market. That was a very short introduction to Pierce and our market. Let's now move to page eight for the Q1 highlights. On page eight, in Q1, we see strong revenue growth. We report 20% growth versus the first quarter last year. In local currencies, the growth was 25%. Adjusted EBIT grows strongly from SEK 2 million last year to SEK 18 million 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 focus on strengthening the assortment, which of course is a key component of our customer value proposition, and during the first quarter, we see good progress. We see revenues from private brands growing 36% to SEK 157 million, and we 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 Mounts, Turtle Wax, to name a few, and more brands are on the way in. Finally, the financial position of the company has strengthened considerably, thanks to a new external financing structure we put in place in connection with the IPO. Page nine, 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 growth in local currencies of 25%. You also notice the exceptional growth in the second quarter last year, which was driven by the COVID-19 effects and also internal actions to stimulate short-term revenue growth and cash generation. In Q3 last year, we suffered from low stock levels as a result of the strong sales in the second quarter and general low product availability in the market. The strong second quarter sales last year, 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 first quarter, we had almost 1.2 million active customers, up 30% on a last 12 months basis. We also see good order growth and stable average order values. Page 11, please. As mentioned, private brand sales is growing strongly by 36% in the first quarter. 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 five. We feel good that we've been able to keep the satisfaction level stable at this good level despite all the COVID-19 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 Tomas Ljunglöf, 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 SEK 2 million in Q1 last year to SEK 18 million. 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% to almost 5% in Q1 2021. As disclosed on this slide, 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 brand share, and a revised price strategy launched in Q4 last year.
The favorable FX development refers to the weakened US dollar versus the euro that took place mid-year 2020. This development helps the gross margin since we only have cash outflows in US dollar related stock purchases and no revenues or cash inflows in dollars. The P&L effect comes with a bit of a delay since it affects the P&L when the purchase items are being sold. When it comes to the total FX effects in absolute terms in 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 mentioned 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 in 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. Since then, the adjusted EBIT margin has continued to increase. As you can see on this slide, we ended up at 7.2% for the rolling 12 months basis in Q1 2021. The margin after variable costs have been stable throughout this period. It is the ratio between overhead costs and net sales that has developed favorably over time, that is related to scalability effects, hence the latter then is 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 net working 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, that was mainly related to the positive related corona effects and then driving sales down and pushing inventory down. Since then, we've been able to keep it on that level. Page 18, please.
When 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 SEK 65 million lower 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 three 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.
As you can see, net debt would then have been SEK 70 at quarter end, SEK 70 million, and this implies an EBITDA coverage of 0.5 times. 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 SEK 440 million end of Q1.
To summarize then, Pierce financial position after the IPO is solid. Now we're going to move on to page 21. On page 21, let me summarize the first quarter and say a few words about the Q2.
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 from both new and existing products. Let me then also, as I said, say a few words about the second quarter. First, just to manage expectations, we do not plan to provide mid-quarter updates on sales and profits regularly going forward.
Since we are reporting so late in a quarter, which is exceptional in many ways and where the comps are extraordinary given the COVID-19 breakout last year, we will make an exception and do so now. When we look at the second quarter, one 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 first quarter continued lockdowns, which reduce the average rider activity level. Still, there are lots of uncertainties in the business, which makes sales planning harder than normal. Second, as I mentioned, we face challenging comps given the exceptional growth in the second quarter last year.
So far in the second quarter this year, when we compare to seven weeks in April and 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.
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%-20% per annum on average and over time. When it comes to the capital structure, we target a net debt that does not exceed 2 times EBITDA. 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 five 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 strengthen the assortment.
We focus particularly on attracting new brands for XLMOTO to make sure that the XLMOTO business becomes even more competitive all over Europe. 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. 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. We focus a lot on driving economies of scale in operations.
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. That would conclude our presentation. Operator, let's move to page three and open up for Q&As.
Thank you. Our first question comes from the line of Daniel Ovin of Nordea. Please go ahead, your line is open.
Yes, good morning, Henrik and Tomas, congratulations on a good first quarter you reported here today. First question is on Q2 and what you're seeing there so far. I noticed that you talk about very difficult comps in April and May, where you grew 50% last year, you talk about the Q2 last year when you grew 39% overall. That suggests then, according to my calculation, that June here should see significantly easier comparables. I just wonder if you can confirm that and talk a little bit about what you expect for June then.
Yes. That's a mathematical fact. If you grow by 50% during a certain period and the whole period grows by 39%, by definition, the growth rate needs to come down, otherwise the equation is not going to solve itself. I just want to add, however, that the growth is not evenly distributed per month.
Exactly, evenly distributed. It goes down a little bit in June versus April, May, then starting to get hot in Southern Europe. That is true. The comps further on in the quarter will be easier.
Okay. Also on the gross margins, it was quite a nice uplift versus last year, and you mentioned a few different drivers there. You talked about FX, shipping costs, et cetera. Can you perhaps just give some indication on, if not the exact number, at least the size of the drivers? Which were the most important ones in the gross margin uplift 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. When we put it on the P&L effect, it has a positive effect there. Roughly, we estimate the US dollar to euro effect to be slightly more than 1 percentage point.
Okay, perfect. That's very helpful. Just final question here, if I may. Also, on the profit after variable cost, you saw quite good support there, almost 200 or around 200 basis points lower than same period last year. You also mentioned here leverage, good cost control, et cetera. 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 2019/2020, and the full effect of that cost program was achieved in Q2. I would also like to add that the overhead costs are to some extent variable. What we do put in the variable, say, to distribute that cost is 100% variable, but there is some volume effects, I mean, for example, the warehouse costs. We got the full effect of the savings in Q2 last year, and obviously, we have received the full effect of that also now. What we did during last year was that things went very well, and we were slowly but surely building up the cost base.
As I also remember clearly that I said in the IPO process that the enormous improvement that we did see on a year-on-year basis, so overhead costs moving from 19% of net revenue down to 14.5% 2020 over 2019, that will not happen again, so to say. Over time, the target here is to reduce the overhead costs versus net revenue, thanks to the scalability effects. If you look at a single quarter like this and compare it to Q1 last year, there are the effects that I just mentioned, that we did do some cuts there that had 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.
We have also clearly made positive scalability effects in certain departments, like customer service, finance, et cetera. Just a final comment, that we were also a little bit helped here by the effects, as I mentioned, in zloty to euro.
Okay, perfect. That's great. Thank you very much for answering my questions.
Thank you.
Our next question comes from the line of Niklas Ekman of Carnegie. Please go ahead. Your line is open.
Thank you. Just a couple of questions, if I may. First, if I can come back on the Q2 guidance you're providing there. Obviously, comparisons were particularly tough in the first half, and sales earnings were flat. Is it safe to assume that that means also that you should be able to at least reach the SEK 44 million 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 that what is flat is the profit after variable cost. That is what's flat, not the earnings, the bottom line, not the adjusted EBIT.
Okay.
We did have an increase, as I just outlined here. If you take away the depreciation and amortization, the overhead cost went up from 55 to 58. As I also mentioned here, we will not be able to repeat the cut that we so clearly did between 2020 and 2019. Is that clear? It's the profit after variable cost that was flat.
Okay. Basically, you're not guiding for higher earnings year-over-year, not at this point, I think.
We're not guiding anything. We're just telling you how things look now. Yeah, I think it's important.
Providing a projection here, we have shared what we have seen so far in terms of our profit after variable costs during the first seven weeks of April and May, since this is a very exceptional quarter.
Very good. Thank you. You mentioned stock shortages here. Is this something that's had a material impact and will continue to impact? Are you seeing tangible price inflation from suppliers? Freight rates are up, but is there a general price inflation that you're seeing at the moment?
We don't see any price inflation yet. 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. At some stage, that may be impacting our product assortments as well, or our purchases as well. Not yet. 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. In 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 from many of our suppliers a reduction in volume production last year, and that is still hanging on there. There is less product available in the market than we would like to see.
We also see some delays, both in terms of external brands and internal brands. I wouldn't say it's super material, but it's impacting here and there and it adds up a bit.
Okay. Thank you. I'm curious here in general also about on-road improving here. 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. It seems to suggest a clear pickup in the on-road segment. What is behind this? I assume that the rider activity level is still low, as you said in your statement here. What's behind the improvement in on-road?
Well, I think there's a couple of things. One is we did make a redirect in the first quarter last year of a business we had acquired, Motobuykers, that we integrated into XLMOTO and as we made that integration, we lost some volumes last year. That makes the comp 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 for the XLMOTO business. 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. 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. I think this quarter shows that we're going in the right direction.
Very good. Thanks. A final, a more detailed question here maybe on the financial expenses. You had net financial expenses last year of SEK 73 million. It's still high here at SEK 14 million in Q1, but you obviously raised capital. 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 SEK million per quarter. That's the running cost for the interest then. On top of that, we will potentially have both positive and negative evaluations of certain assets that is booked on the financial debt. Over time, that kind of goes to zero then.
A few SEK million, that's like SEK 3, 4 million?
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. Just as a reminder to participants, if you do wish to ask a question, please dial 01 on your telephone keypads now. That next question comes from the line of Carl-Johan Svanvik of Carnegie Investment Bank. Please go ahead. Your line is open.
Thank you very much, good morning, Henrik and Tomas. Two questions from my side here. First of all, on the private label sales here in Q1. Looking here at off-road, you grew roughly revenues by SEK 40 million year-on-year. I see that private label is really driving roughly SEK 22 million of these. Quite a large growth here year-on-year in private label, particularly down in the off-road segment. Could you say anything here, is there any particular brand in the private label portfolio? You also talked about this Raven 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 private brands in total, not all of them for the off-road business. When it comes to the off-road market, we see very good growth on Raven, which is a brand for jerseys and helmets, et cetera. We launched a new collection last year that is still doing really well. The Raven Edge collection was launched towards the very end of the first quarter. The impact there is going to be smaller in the first quarter, but we expect more from that in the quarters to come.
Okay, perfect. 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 sort of countries outside the Nordic here in Q1. Are there any countries that you want to sort of highlight that are performing above expectations and below expectations? 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.
It is a difficult quarter given all the lockdowns, right? In general, we are, as you say, performing on the off-road a lot better outside Nordics than we are in the Nordics. I think there are a couple of reasons for that. One is we had a sort of long winter here, which of course impacted riding activity on the off-road for our business, with more favorable weather in Central and Southern Europe. Also we have a very high market share also in Nordics. 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 first quarter. 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. As there are no further questions on the phones, I'll hand back to our speakers.
Okay. With that, I say thank you everyone for listening in to our first ever earnings call. With the next report we have on the 25th of August, that will be the Q2 numbers, and I welcome you all back to that meeting. Thank you very much, everyone. Thank you.