Earnings Call: Q2 2021

Jul 27, 2021

Thank you. Good morning, everyone. I'm Henrik Zadig, I'm the CEO and I have Thomas Jungleff, our CFO with me here in the office. And welcome to the Peers' 2nd quarter earnings call. As you noticed, we decided to release the 2nd quarter record 1 month earlier than we originally planned as the book closing process went faster than expected. And as a consequence, we have also moved forward the date for the Q3 report a few weeks to the 11th November. Page 3, please. I'll start by on the agenda today, I'll start by making a very short introduction to Pearson Upmarket And then we will cover the Q2 highlights and a financial update and then we have a summary and Q and A. So Page 4, please. PIRS 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 2 thirds of our sales coming from outside the Nordics. We sell everything that a motorcycle rider needs Except for the actual bike, we focus on gear, parts and accessories. And what's unique about Pier's is our private brands, which have Been growing steadily for many years and now represent 42% of revenues. Down to the left, You'll see we have a long term positive financial trend with solid revenue and EBIT growth. And as we've been saying Repeatedly, when you look at the full year 2020 numbers, it is important to remember that the Q2 last year was fueled by an extraordinary growth on the revenue due to the corona breakout. And we estimate that the full year adjusted EBIT last year was impacted positively by SEK 15,000,000 from that. So the SEK 97,000,000 reported adjusted EBIT last year would have been SEK 82,000,000 without the pandemic effect. Page 5, please. We operate in a European market that is worth about SEK 100,000,000,000 in total if we include what is sold both in physical stores and online stores. And the online market was sized at SEK 13,000,000,000 in 2019, which means there was an online penetration of 14%. And just like in many 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, so effectively double in size over 5 years to around SEK27 billion. And we estimate we had a 10% share of the European online market last year. Let's now move to Page 7, please, for the Q2 highlights. As we've repeatedly said, Q2 this year was always going to be a challenging quarter for peers given our exceptionally strong results during the Q2 last year when the pandemic broke out and the physical shops closed down. Overall, I rate this a stable quarter despite the number of challenges related to COVID-nineteen. If I start on the financial side, in the Q2, we report revenues that shrink by 1% in local currencies, which corresponds to a decline of 5% in reported numbers. In June, we saw positive growth. And if we extend the horizon and look back 2 years to the Q2 2019, we see continued underlying steady growth, which suggests that last year was an anomaly. And we saw COVID impacting us in a number of ways. First, there are continued Product availability issues in the market due to production constraints with our suppliers as well as ongoing disturbances within the Global Supply Chain, which causes delays. We also, on the customer side, saw a different online browsing behavior this quarter versus the Q2 last year. This year, the customers spent less time online browsing around for different alternatives, but were more buying prone when they did so. And this has resulted in lower traffic, which almost entirely was compensated by higher conversion rates. We also saw lower traffic among our main competitors in the tools we have. But overall, I would say the situation is uncertain and difficult to analyze at this stage. Adjusted EBIT landed on SEK 32,000,000. That equals a respectable margin of 7%, which however is 2.4 percentage points lower than our record quarter last year. I think the team has managed the margin very well here in challenging conditions, including, for example, SEK 8,000,000 of higher container shipping costs, COGS pressure and the product shortages I talked about. We have also invested a bit more in the organization, specifically marketing, product development and IT to drive future growth and scalability. Looking at the net profit line, it improved from SEK 16,000,000 last year to SEK 21,000,000 now and that's driven by the new financing structure with lower interest costs after the IPO. Moving to the operations. Overall, we see good traction on our KPIs. One of our strategic priorities is to strengthen the assortment and in the Q2 we see good results on that. We see revenues from our private brands growing by 3% to SEK 165 1,000,000. This means that the private brand share is increasing, which impacts the gross margin positively. We have also signed new strong external brands for the on road segment, including Dainese and AGV, 2 of the leading global brands within motorcycle gear. And in this quarter, like in all previous quarters that I've been here and I've In our 5 years, we have continued to manage the ongoing challenges that many high growth companies are facing every day, including, for example, to upgrade and automate So they become more robust, fine tune the technology setup, onboard high caliber staff to name a few. If we look forward, we remain confident in the underlying growth of the online market and the long term trend, And our long term financial targets stand firm. However, we see continued uncertainty in the short term from COVID-nineteen. We expect continued challenges on the product availability coming from shortages in the market and delays. This means that we overall have lower visibility than normally. Although I should say that the inventory is in a better condition than last year. We also have increasing container costs from Asia and we have pressure on COGS from raw material price increases that we need to mitigate. And the team has done a terrific job to mitigate the impact of these factors during the Q2, and this job needs to continue. Page 8, please. When looking at the revenue and the growth for the last six quarters, there are a few things that stand out. First, as I mentioned, The exceptional growth of 39% in the Q2 last year was driven by the COVID-nineteen effect and internal actions to stimulate short term revenue growth and cash generation. So for example, last year in Q2, our largest segment, Off Road, grew by 48% in the Q2. And in Q3 last year, we suffered a bit from low stock levels as a result of the strong sales in the 2nd quarter and low product availability in the market. And in Q2 this year then, we declined by 1% in local currency due to the difficult comps and a number of product availability issues. Page 9, please. If we extend the horizon and look back at the revenue Since 2019, we see that the growth rate in the Q1 this year and Q2 this year are on similar levels. Looking at the left side, you see that the Q1 had a 19% CAGR and to the right, the 2nd quarter, a 17% CAGR in local currency. So we are confident that the underlying growth is there. Page 10, please. Looking at the operational KPIs, we see that the base of active customers is growing steadily to north of 1 1000000 active customers. And the average order value is growing well, in particular, thanks to a stronger and better assortment within On Road. Page 11, please. The private brand sales is growing strongly with 21% on a last to a month basis. And the customer satisfaction scores are stable on a very respectable 4.2 out of 5 based on the now 100,000 reviews that we passed in June. We have worked a lot to improve the processes to strengthen both the customer experience and the scalability. One example from this work is that the customer contact rate is now down significantly versus last year, which shows that the processes are getting better. But there is still more for us to do here. Let me now hand over to our CFO, Thomas Junglef, to provide a financial update on Page 13. Good morning, everyone. Net revenue in Q2 was basically flat in local currency compared to Q2 of last year. Then the net revenue was clearly positively affected by corona, the COVID-nineteen related effects. Contribution margin in too was slightly lower than last year. A slight gross margin improvement was more than counterbalanced by somewhat higher direct costs. Year to date top line was up by almost 10% in local currencies versus last year. And as opposed to in Q2, contribution margin did improve. The main reason for this improvement was the increased shipping costs from Asia affecting Q2 clearly negatively, but Q1 only marginally. Page 14 please. In Q2, adjusted EBIT decreased versus positively COVID-nineteen effective comparison numbers, while on a year to date basis adjusted EBIT was slightly up. Page 15 please. Here we've done a bridge between last and this year's adjusted EBIT in Q2. And the purpose of this slide is to disclose the estimated corona effects direct and indirect as well as get an understanding of the underlying developments. As previously communicated, we roughly estimate that adjusted EBIT in 2020 was affected by positively by COVID-nineteen related effects of roughly SEK 15,000,000. In Q2, adjusted EBIT was clearly positively affected, thanks to the exceptional growth and in Q3 slightly negatively affected due to some optimal slope availability. And adjusted EBIT in Q2 2020 is estimated to have been positively affected by somewhat more than SEK 50,000,000 from positive krona effects. And that's the part number 1 in the bridge then. Part number 2 He refers to the increased shipping costs due to higher container prices, which is an indirect effect related to the corona. And part number 3 in the bridge of somewhat more than SEK 11,000,000 represents a rough estimate of the adjusted EBIT effect relating to the underlying top line on fees, which obviously then exclude the extreme growth that we saw last year or parts of that extreme growth. Page 16 please. There are 3 larger effects explaining the adjusted EBIT margin decrease versus Q2 last year. That would be gross margin, direct costs and overhead costs. When it comes to the gross margin, there are quite a few factors, both positive and negative, explaining the net positive change. The increase of the direct cost to sales ratio can be explained by higher performance marketing costs. And when it comes to overhead, the overhead cost increase, it mainly refers to some investments that we've done in the organization such as sales marketing, product development and IT. Page 17 please. When it comes to off road, which stands for around 2 thirds of our total business. The developments largely mirror the developments of the total company. Page 18 please. The same can be said for on road. But here we can see some positive effects of an increasing Average order value pushing the end customer freight to sales ratio down a bit and hence improving profitability. Page 19 please. Net working capital increased mainly due to increased stock. Inventory levels in Q2 end of Q2 2020. They were unsustainably low. There are uncertainties connected to the stock availability going forward here. While we plan to build up inventory, we also actually put in somewhat of a safety margin to really avoid having too low inventory and get the most out of the demand on the market during the next couple of quarters. Page 20, please. Operating cash flow last 12 months was SEK 30,000,000. If we exclude IPO related expenses also paid during this period, it was SEK 50,000,000. Page 21, please. This is a bit of a busy Sure that the message is that after the IPO early in Q2, we replaced our previous financing structure with a SEK 300,000,000 credit facility. And in the column to the right there, you can see that net debt in Q2 was NOK 55,000,000 And we had almost SEK 250,000,000 in an undrawn credit facility. Further, the group equity was more than SEK 400,000,000 at the end Q2. And hence both the cash and equity positions are deemed to be strong. I will now hand back to Henrik for a wrap up. Page 23, please. Thank you. So to wrap up the half year report. Q2 was a stable quarter where we despite multiple challenges report flat revenue in local currency and a solid adjusted EBIT margin of 7%, although that was 2.4 percentage points lower than the record quarter last year. And if you look at the 1st 6 months of this year, peers is growing revenues by 9% in local currencies We are growing adjusted EBIT by 8%. So we are a stronger and better company than last year. The company is financially strong. We have a robust cash and equity position and our KPIs develop well And we continue to see progress in our strategic priority to strengthen the Onload assortment, where we this quarter signed both Daimese and AGV, 2 leading global brands, which will be important additions to our XLMOTO store. Looking forward, we remain confident In the underlying growth of the online market and the long term trend, our long term financial targets stand firm. However, in the short term, we see continued uncertainty from COVID-nineteen. We expect continued challenges regarding product availability coming from shortages in the market and global supply chain disruptions. Although, I should say, the inventory is in a better condition than last year. And on the cost side, We will have increase in container costs from Asia, and there will be some pressure on COGS from raw material price increases that we need to mitigate. And I think as countries open up and ease the COVID-nineteen restrictions, we expect motorcycle riders to go out on the tracks and roads again and increase their activity levels, which should be a positive. Page 24, please. So given the situation, our main focus is on the here and now. And in the short term, Margin management is going to be key to mitigate the increase in container shipping costs and the increasing raw material costs and adjust campaign plans to the product availability. We played this very well in the Q2 and we need to continue to do so. We're also preparing some exciting launches of new private brand products and the new external brands that we've signed. And of course, we're finalizing the preparations for the upcoming campaign season that starts with Black Week. Given the uncertainty regarding product availability in the market, we think it is prudent to work with extra safety margins. So we are planning to build up inventory earlier than what we usually do to ensure we have a winning offer to present our customers. Longer term, driving OpEx scalability and improving the customer experience are key drivers for our long term success. So these are very much part of our plans. Now that concludes our presentation. So operator, let's move to Page 25, and open up for Q and A. Thank you so much. Our first question comes from the line of Daniel Obens from Nordea. Please go ahead. Your line is open. Yes. Good morning, Henrik and Thomas, and thank you for taking my questions. First question on sales. So sales was down around 5 Year over year. And I wonder here a bit how it played out over the quarter. I remember in the Q1 conference, we talked about 50% sales growth in April, May. And then it seems like it was getting easier comparison in June. And here, I wonder, did you see sales improve by the end of the quarter? Or did the reopening of stores in some countries impact yourself Negative. That's the first question. Yes. I mean, it's correct. Last year, we grew in the 2nd quarter by 39% in total over the quarter and close to 50% during the 1st 7 weeks. That means that the last 6 weeks or so was a bit lower. But still, the growth was respectable in the 30s or so last year, right? And again, the Off Road segment, our largest segment last year, grew by 48% during the quarter. So we had difficult comparisons. Now if you look this year, we were and if you think back to the conference call we had at the end of May, We were declining marginally in the 1st 7 weeks versus last year in local currencies. And we did this year then during the last sort of 5 weeks or so see positive growth again. So yes, that's how it played out, shrinking in the 1st 7 weeks and then we saw growth in the second half. And we ended up on a negative 1% versus last year in local currencies for the Q4. Yes. Okay. And if you would look now in the countries where you're operating in Europe and some regions and countries have Come further in the European and lifting restrictions, etcetera. And I wonder, do you see a kind of negative sales impact in those Particular regions or countries from customer going back to stores or is that really not a reason you think of declining sales growth for the quarter. No, I wouldn't say we can't say that. I mean if you look in the geographical splits, In the Nordics, we grow by if we adjust for FX in the Nordics, we grow by 3% in the quarter. And in the outside the Nordics, we declined by 3% roughly. So there is a slightly better growth in the Nordics versus outside the Nordics. But exactly does that have to do with the opening of the stores or not? I think that's very, very difficult to say. As I said, overall, this situation is Difficult to analyze at this stage. But I'm sure versus last year, there are more physical stores open this year in Europe than last year. I mean, last year, everything was completely shut down. And of course, that helps online players like us. Now this year many of the stores are open again, right? And we should remember that 85% or so of the total market is still going to physical stores. The online penetration is increasing gradually year over year, but still the majority of the sales is taking place in the physical stores. Okay. Then also one question here on this Shortage of stock. So I wonder now if you can say anything about how the situation developed over the quarter and also into Q3. 3. And also one question here of where that shortage is because if I remember correctly, you had a shortage of spare parts in Q3 last year. And that have a higher margin. That also impacted your margins negatively. So I wonder if you can say anything of, Firstly, how the development is over the quarter and into Q3 and then also if the mix, if you see the same kind of Shortage mix of shortages this year. Yes. If you we actually have that in the appendix of the presentation, where we have split the inventory into physical stock And with St. Francis, and also obviously the physical stock is the driver for the soft line, right? So if you end of Q2, we had a physical stock of Around SEK295 million, right? That was SEK10 million higher than in Q1. So we have been able to push this up a little bit. As Henrik said earlier, we are in better shape compared to Q2 of last year, Well, we have sold a lot. And at that time, these fiscal stocks end of Q2 last year, that was around 2.45%. So we have You have pushed it up by 20% compared to that period. But it is hard. We There's a lot of orders. And from external suppliers, we're not getting everything that we want, right? So in order to get out of this Stock availability issue that pushed the sales down to some extent and we foresee that it pushed The sales down in Q2 more so than in Q1. In order to get out of this, let's say, vicious circle, we're Pushing quite hard and putting in some extra orders to build up results now during Q3. And we hope to get in more, perhaps than we usually would have Shooting for due to the uncertainty in order to get the most out of the campaign season in Q4. And then just to add to that then, in Q2. So in Q3 last year, in July August, this stock actually went down. We had problems there as well. And that For sure then, there's pressure on the top line in Q3 of last year. So we are in better shape, but the situation is uncertain. I would appreciate to get it out. Okay, great. Then just a final last question here on the Shipping expenses. So first, I wonder a bit on how the contracts work. So basically, if I look at a Shipping rate index or something like that. Should I expect your cost to move in that way? Or do you work on a kind of contract The nature is more of a spot nature. How should I get that to get a sense of how your shipping cost is developing? We operate on a spot price basis. And I mean before this crisis or limited access to the containers relating to the corona outbreak of last year. I believe the average container price was in the range to $2,500,000 and now he's slightly less than $10,000 So it has gone up considerably. And we saw some effect in Q1, but as I mentioned, it was quite small at that point, but we knew it was coming. Because I mean we recognize this extra cost when we do sell the stuff and it increases the stock value and then when we sell it, we see it on the cost of goods sold. And as we wrote here, on a total basis, that includes the freight from Europe as well. But on a total basis, The in freight cost, as you call it, went from NOK 12,000,000 to NOK 20,000,000. So it and that increase He refers to the containers from Asia predominantly. And that hit us quite hard, as you can see in the bridge that I And if you look at it from a margin perspective, gross margin perspective, it hit us around 1.8percent, 1.9 percentage points. It is. And if you look forward here, I mean, neither of us, I presume, is an expert in future container prices. But there is a risk, as far as I understood that the cost of the container could go up even more. But then again, our competitors are in the same situation. And we hope that we keep the margins up. We're all in the same boat here. So I think Let's see how that plays out. At least it should not be impossible. And we were facing this situation also. I think it's important to to reiterate that in the Q2, we threw a lot of actions, pricing actions, different campaign actions, we're able to still keep very healthy gross margin levels. So we need to continue to play that game now in Q3 and I believe also Q4. Yes. And then we'll also look over our the really bulky stuff where the container price is the largest share of the total cost, right? Okay, perfect. That's all my questions. Thank you very much. Thank you. Our next Question comes from the line of Mikael Jektmann from Carnegie. Please go ahead. Your line is open. Thank you. Yes, first question here is on current trading. This is Something you don't really comment, you just talk about challenging continued challenging and uncertain markets. But can you say anything, I Obviously, the comparisons in Q3 are much easier than Q2. Can you say anything about the monthly development last year? Was there any major difference in July versus September, for instance. And was there any tangible difference also in Offshore versus On Road in Q3 of last year? Yes. I mean, yes, we do as you say, Niklas, we don't want to comment on current trading. We did it last time because we reported so late at the end of May. So we said that was an exception. But it's important not to draw too large conclusions just what happens in a few weeks. And that's why we will stand to that and not comment on the current trading this quarter. However, last year, so as Thomas alluded to, what happened was that the inventory level went gradually down during the Q3 last year. So obviously, that means it was higher in as we started the quarter And then it got gradually sort of worse. So performance wise, July was better last year than September from a sales growth perspective. That's what sort of what we're facing this year in the Q3. And just to add to that, in late September, we actually got in some inventories. On a net net basis, it actually grew somewhat last year. You can see that in the appendix. But as Appendix just said and as also said earlier, during the quarter, it actually went down before going up and that made his sales in September proper. Okay. Very good. Thank you. And the second question is on on road traffic. Basically how much do people use their motorbikes? Do you have any good Statistics on this for the European market. How much do people drive motorcycles now compared to 2019? Yes. I wish we had that. If you find that source, please let me know. And to our best ability and we'll be looking around, we don't have that. It doesn't exist. So it will be fantastic to know the number of kilometers bought, etcetera. So we can What we can see just is sort of traffic overall on online sites, right? And what I mentioned in my So the opening speech there is that we saw declining traffic in the Q2 of this year versus last year, but we saw higher conversion rate. And the conversion rate improvements almost entirely netted out the traffic decline. But I think what we expect is that as countries open up after and ease the restrictions on COVID-nineteen, we Spent motorcycle riding activity, including for commuters to increase, but it's too early to say that, that is happening or not. We just don't have that level of kilometer ridden on the bike statistics. Okay. Fair enough. And I'm also curious here on you talk about rising raw material prices, Shipping costs increasing significantly. I mean, how long does it typically take to mitigate that impact? And particularly now that you say these are Safaris that are neutral for the entire industry. So everyone's in the same boat and we'll need to mitigate. How long does it typically take? And also as a follow-up on that, when you talk about shipping costs here having a negative impact of SEK 8,000,000, I assume that's the gross impact. If you made Price hikes during the quarter that would partly mitigate. So the net impact would be slightly less than SEK 8,000,000. Is that the correct assumption? Yes. That's the gross impact. That is correct. And we were facing, as you say, Niklas, we were facing this situation in the Q2 where the gross impact hitting us and therefore, we had to adjust or we had to mitigate through Campaign activities through pricing actions to hike up certain prices, etcetera. So we had to be it was a very busy Quarter from that perspective. But again, I think we played that game very well in the 2nd quarter. So we have got a lot of practice. And now we need to play the same game, maybe even more intensely in the Q3 and Q4 to protect then the margins. Okay. Another question I have is on marketing costs. We've heard other online retailers Talk about marketing expenses having been very low last year during the early months of the pandemic and how they have Written strongly and are much more expensive now and higher than the 2019 level in some cases. Is that what you're seeing as well On your side. Yes. We're seeing that. We saw the marketing costs were quite low in the early part of the pandemic. Maybe it's difficult to say, but maybe it was because some competitors pulled back or put a break on the marketing expenses. We see that the cost per click is increasing a bit this year versus last year, for example. And that there are more active players now than in the Q2 last year. I would say the Q2 last year Was the anomaly and then the competitors came back gradually during the 3rd Q4, right? So now it's sort of back to normal, I would say. Very good. Thank you. And last question here is on M and A activity. Can you Remind us a little bit about your view on M and A activity. Do you see potential for M and A already this Here, can you say anything about pricing? Can you tell us anything about your key focus areas for potential M and A? I mean, M and A is part of our long term plan. And we have said that if we want to do an M and A, it would be for something that adds something new to us. That could be a new brand. It could be new insights. It could be access to a new geography. We don't want to acquire a player just to get access to a customer base because we think in that case, we could be more efficient by increasing our investment in marketing. I mean the market is very fragmented and there is a lot to do. So obviously, we are keeping an eye on potential targets out there. But right now, I think the focus is, it's here and now as I said, there's a lot for us to do now to manage the margins and We keep our focus there. So M and As are interesting for us and it's very much part of the plan. But for the short term, we focus on the here and now. Very clear. Thank you so much for taking my questions. Thank you. Thank you. Our next question comes from the line of Karl Davengers from Carnegie. Please go ahead. Your line is open. Thank you very much and good morning Henrik and Thomas. So first a follow-up question here on the stock availability. Could you say that you have experienced any lost sales here during Q2 due to the component shortages? Or is it mainly sort of internal challenges for you during the quarter? Now we have clearly lost sales because of shortages. Yes, we see shortages both On external brands, there are certain brands that really struggle with our production lines and that makes us not being able to buy as many products or source as many products as we would like to and that's as we see there is demand for. So that's one part of it. And the other one is that there are delays. There are delays on also our private brand side, right? So overall, we are lacking In the Q2, we're lacking high runners, and that drives traffic normally and drives sales normally. So that is lost sales. I understand. And did you could you provide any quantification or have you made any estimate what you have lost Due to that in Q2? No, no. We can say that we lost more in Q2 than in Q1. And we did lose even more, I would say, in Q3 of last year. And that's why we're so keen on building up here. So we're actually working a little bit more in betting that we're not going to get everything right. So in order to avoid Being hit once again by increasing stock shortages and hence Q2 was worse than Q1. And we will avoid that in Q3 And get the most out of it. And then it's also obviously very important ahead of the campaign season then to get the stock in. Last year, as I said earlier, we saw a little bit of an increase in September. And then fortunately, we had a lot in October last year, hence the foundation for a successful campaign season. So we're doing all we can to avoid that. Okay, perfect. Very clear. And my second question is on the EBIT bridge here on Slide 15. Talk about an estimated COVID impact on EBIT of slightly more than EUR 50,000,000. Is there anything we should remember here going into Q3 and Q4? And maybe more specifically on Q4 then given that you're facing slightly Tough comparisons there. Do you have any sort of quantification on a COVID positive EBIT impact in Q4 from last year? Or is that mainly related to Q2 in 2020. We said in the prospectus and have said all along that the total effect Estimated effect on relating to positive COVID effects for the full year 2020 was in the range of SEK 15,000,000, right? And we saw no material effects in Q1 or Q4. So we saw a very positive effect mainly relating to top line in Q2 and then we saw an adverse effect in Q3 relating to the stock shortages. And the net out of those are the 15%. And consequently, based upon what I just described, it was higher and 15 in Q2. Is that clear? Very clear. Thank you very much. Thank you. Thank you. We have no more questions from the line. I will hand it back to our speakers. Okay. With that, thank you very much for listening in to the 2nd quarter earnings call from Pirs. And we will be back with the 3rd quarter on 11th November. Thank you very much.