Thank you. Good morning, everyone. I'm Henrik Zadig. I'm the CEO, and I have Tomas Ljunglöf, our CFO, with me here in the office. Welcome to the Pierce second- quarter earnings call. As you noticed, we decided to release the second quarter report one month earlier than we originally planned, as the book closing process went faster than expected. As a consequence, we have also moved forward the date for the Q3 report a few weeks to the 11th of November. Page three, please. On the agenda today, I'll start by making a very short introduction to Pierce and our market, and then we will cover the Q2 highlights and 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, 2/3 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. What's unique about Pierce 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. As we've been saying repeatedly, when you look at the full year 2020 numbers, it is important to remember that the second quarter last year was fueled by an extraordinary growth on the revenue due to the corona breakout. We estimate that the full year adjusted EBIT last year was impacted positively by SEK 15 million from that.
The SEK 97 million reported adjusted EBIT last year would have been SEK 82 million without the pandemic effect. Page five, please. We operate in a European market that is worth about SEK 100 billion in total, if we include what is sold both in physical stores and online stores. The online market was sized at SEK 13 billion in 2019, which means there was an online penetration of 14%. 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 five years to around SEK 27 billion. We estimate we had a 10% share of the European online market last year. Let's now move to page seven, please, for the Q2 highlights.
As we repeatedly said, Q2 this year was always going to be a challenging quarter for Pierce, given our exceptionally strong results during the second quarter 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-19. If I start on the financial side, in the second quarter, 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. If we extend the rise and look back two years to the second quarter 2019, we see continued underlying steady growth, which suggests that last year was an anomaly. 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 second quarter last year. This year, the customers spent less time online browsing around for different alternatives, but were more buying- prone when they did so. 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 million. 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 million 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 million last year to SEK 21 million now. 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. In the second quarter, we see good results on that. We see revenues from our private brands growing by 3% to SEK 165 million. 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 Onroad segment, including Dainese and AGV, two of the leading global brands within motorcycle gear. In this quarter, like in all previous quarters that I've been here, and I've been here now five 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 processes so they become more robust, fine-tune the technology setup, onboard high-caliber staff, to name a few. We look forward, we remain confident in the underlying growth of the online market and the long-term trend. Our long-term financial targets stand firm. We see continued uncertainty in the short term from COVID-19. 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 costs from raw material price increases that we need to mitigate. The team has done a terrific job to mitigate the impact of these factors during the second quarter, and this job needs to continue. Page eight, 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 second quarter last year was driven by the COVID-19 effects and internal actions to stimulate short-term revenue growth and cash generation. For example, last year in the second quarter, our largest segment Offroad grew by 48% in the second quarter.
In Q3 last year, we suffered a bit from low stock levels as a result of the strong sales in the second quarter and low product availability in the market. 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 nine, please. If we extend the horizon and look back at the revenue CAGR since 2019, we will see that the growth rate in the first quarter this year and Q2 this year are on similar levels. Looking at the left side, you see that the first quarter had a 19% CAGR, and to the right, the second quarter, a 17% CAGR in local currency. 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 1.1 million active customers, and the average order value is growing well, in particular, thanks to a stronger and better assortment within Onroad. Page 11, please. The private brand sales is growing strongly with 21% on a last 12 months basis, and the customer satisfaction scores are stable on a very respectable 4.2/ 5 based on 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. There is still more for us to do here.
Let me now hand over to our CFO, Tomas Ljunglöf, 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. The net revenue was clearly positively affected by corona, the COVID-19 related effects. Contribution margin in Q2 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-19 affected 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.
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 positively by COVID-19 related effects of roughly SEK 15 million. In Q2, adjusted EBIT was clearly positively affected thanks to the exceptional growth, and in Q3, slightly negatively affected due to suboptimal stock availability. Hence, adjusted EBIT in Q2 2020 is estimated to have been positively affected by somewhat more than SEK 15 million from positive corona effects. That's the part number one in the bridge then. Part number two refers to the increased shipping costs due to higher container prices, which is an indirect effect related to the corona.
Part number three in the bridge of somewhat more than SEK 11 million represents a rough estimate of the adjusted EBIT effect relating to the underlying top-line increase, which obviously exclude the extreme growth that we saw last year or parts of that extreme growth. Page 16, please. There are three larger effects explaining the adjusted EBIT margin decrease versus Q2 of 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 sales ratio can be explained by higher performance marketing costs. When it comes to overhead, the overhead cost increase, this 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 Offroad, which stands for around 2/3 of our total business, the developments largely mirror the developments of the total company. Page 18, please. The same can be said for Onroad. 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 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 the 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 million. If we exclude IPO-related expenses also paid during this period, it was SEK 50 million. Page 21, please. This is a bit of a busy picture, but the message is that after the IPO early in Q2, we replaced our previous financing structure with a SEK 300 million credit facility. And in the column to the right there, you can see that net debt in Q2 was SEK 55 million, and we had almost SEK 250 million in undrawn credit facility. Further, the group equity was more than SEK 400 million at the end of Q2, and hence both the cash and equity positions are deemed to be strong. I will now hand back to Henrik for the wrap-up. Page 23, please.
Thank you. 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. If you look at the first six months of this year, Pierce is growing revenues by 9% in local currencies, and we are growing adjusted EBIT by 8%. 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 developed well, and we continue to see progress in our strategic priority to strengthen the Onroad assortment, where with this quarter signed both Dainese and AGV, two 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-19. 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. 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. I think as countries open up and ease the COVID-19 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.
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 second quarter, 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. 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. These are very much part of our plans. That concludes our presentation. Operator, let's move to page 25 and open up for Q&As.
Thank you so much. If you do wish to have a question, please press zero one on telephone keypad. If you do wish to withdraw your question, you can do so by pressing zero two to cancel. Our first question comes from the line of Daniel Ovin from Nordea. Please go ahead. Your line is open.
Yes. Good morning, Henrik and Tomas, and thank you for taking my questions. First question on sales. Sales was down around 5% year-over-year, and I want to hear a bit how it played out over the quarter. I remember in the Q1 conference, we talked about 50% sales growth in April or May, and then it seems like it was getting easier comparison in June. Here I wonder, did you see sales improve by the end of the quarter, or did the reopening of stores in some countries impact your sales negatively? That's the first question.
Yeah, it's correct. Last year, we grew in the second quarter by 39% in total over the quarter and close to 50% during the first seven weeks. That means that the last six weeks or so was a bit lower. Still, the growth was respectable in the 30%s or so last year, right? Again, the Offroad segment, our largest segment last year, grew by 48% during the quarter. We had difficult comparisons. If you look this year, if you think back to the conference call we had in the end of May, we were declining marginally in the first seven weeks versus last year in local currencies. We did this year then during the last five weeks or so, see positive growth again. Yeah, that's how it played out.
Shrinking in the first seven weeks, and then we saw growth in the second half, and we ended up on a -1% versus last year in local currencies for the fourth quarter.
Yeah. Okay. If you would look now in the countries where you're operating in Europe and some regions and countries have come further in the reopening and lifting restrictions, et cetera. I wonder, do you see a kind of negative sales impact in those particular regions or countries, from customer going back to stores? Is this really not a reason you think of declining sales growth for the quarter?
No, I wouldn't say we can say that. If you look in the geographical split, in the Nordics, if we adjust for FX in the Nordics, we grow by 3% in the quarter, and in the outside the Nordics, we decline by 3%, roughly. There is a slightly better growth in the Nordics versus outside the Nordics. Exactly does that have to do with the opening of the stores or not? I think that's very difficult to say. As I've said, overall, the situation is difficult to analyze at this stage. I'm sure versus last year, there are more physical stores open this year in Europe than last year. Last year, everything was completely shut down, and of course, that helps online players like us.
Yeah.
This year, many of the stores are open again, right? 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.
One question here on this shortage of stock. I wonder now if you can say anything about how the situation developed over the quarter and also into Q3. Also, one question here of where that shortage is. If I remember correctly, you had a shortage of spare parts at Q3 last year, and that have a higher margin. That also impacted your margins negatively. 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 mix of shortages this year.
Yes. We actually have that in the appendix of the presentation. There we have split the inventory into physical stock and goods in transit, obviously the physical stock is the driver for the top line, right? End of Q2, we had a physical stock of just around SEK 295 million, right? That was SEK 10 million higher than in Q1. We have been able to push the stock up a little bit. As Henrik said earlier, we are in better shape compared to Q2 of last year, where we have sold a lot. At that time, the physical stock end of Q2 last year, that was around SEK 245 million. We have pushed it up by 20% compared to that period. It is hard. There's a lot of orders, and from external suppliers, we're not getting everything that we want, right?
In order to get out of this stock availability issue that pushed the sales down to some extent, and we could see that it pushed the sales down in Q2 more so than in Q1. In order to get out of this sort of vicious circle, we're pushing quite hard and putting in some extra orders to build up the stocks now during Q3. We hope to get in more perhaps than we usually would have been shooting for due to the uncertainty in order to get the most out of the campaign season in Q4. Just to add to that then, in Q3 last year, in July and August, the stock actually went down. We had problems there as well, and that for sure then pushed pressure on the top line in Q3 of last year.
We are in better shape, but the situation is uncertain. We're pushing to get it out.
No, I agree. Just a final last question here on the shipping expenses. First I wonder a bit on how the contracts work. 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 nature? Is it more of a spot nature? How should I look at that to get a sense of how your shipping cost is developing?
We operate on a spot price basis. 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 of $2,000-$2,500, and now it's slightly less than $10,000. It has gone up considerably. We saw some effect in Q1, but as I mentioned, it was quite small at that point, but we knew it was coming because 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. As we wrote here on a total basis, that includes the freight from Europe as well. On a total basis, the in freight cost, as we call it, went from SEK 12 million-SEK 20 million then.
That increase refers to the containers from Asia predominantly. That hit us quite hard, as you can see in the bridge that I disclosed. If you look at it from a margin perspective, gross margin perspective, it hit us around a 1.8 percentage points- 1.9 percentage points. If you look forward here, 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 a container could go up even more. Then again, our competitors are in the same situation, and we hope that we keep the margins up, and we're all in the same boat here. I think let's see how that plays out. At least it should not be impossible.
We were facing this situation also. I think it's important to reiterate that in the second quarter, we, through a lot of actions, pricing actions, different campaign actions were able to still keep very healthy gross margin levels. We need to continue to play that game now in Q3, and I believe also Q4.
Yeah. We also look over our port and avoid the really bulky stuff where the container price is the largest share of the total cost.
Okay, perfect. That's all my questions. Thank you very much.
Thank you. Our next question come from the line of Niklas Ekman 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 here. You just talk about continued challenging and uncertain markets. Can you say anything? Obviously, the comparisons in Q3 are much easier than Q2. Can you say anything about the monthly developments last year? Was there any major difference in July versus September, for instance? Was there any tangible difference also in Offroad versus Onroad in Q3 of last year?
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. We said that was an exception. It's important not to draw too large conclusions, just what happens in a few weeks. That's why we will stand to that and not comment on the current trading this quarter. However, last year, as Tomas alluded to, what happened was that the inventory level went gradually down during the third quarter last year. Obviously, that means it was higher as we started the quarter, and then it got gradually sort of worse. 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 third quarter.
Just to add to that, 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. As Henrik just said, and I also said earlier, during the quarter, it actually went down before going up, and that made the sales in September suffer.
Okay. Very good. Thank you. The second question is on Onroad 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?
Yeah. I wish we had that. If you find that source, please let me know. To our best ability, and we've been looking around, we don't have that. It doesn't exist. It would be fantastic to know the number of kilometers bought, et cetera. What we can see just is sort of traffic overall on online sites. What I mentioned in my sort of opening speech there is that we saw declining traffic in the second quarter this year versus last year, but we saw a higher conversion rate. The conversion rate improvements almost entirely netted out the traffic decline. I think what we expect is that as countries open up after and ease the restrictions on COVID-19, we expect motorcycle riding activity, including for commuters, to increase. It's too early to say that is happening or not.
We just don't have that level of kilometer ridden on the bike statistics.
Okay. No, fair enough. I'm also curious here on, you talk about rising raw material prices, shipping costs increasing significantly. How long does it typically take to mitigate that impact? Particularly now that you say these are factors that are neutral for the entire industry, so everyone's in the same boat and will need to mitigate. How long does it typically take? Also, as a follow-up on that, when you talk about shipping costs here having a negative impact of SEK 8 million, I assume that's the gross impact. If you've made price hikes during the quarter, that would partly mitigate, so the net impact would be slightly less than SEK 8 million. Is that the correct assumption?
Yes, that's the gross impact. That is correct.
We were facing, as you say, Niklas, we were facing this situation the second quarter with 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, et cetera. It was a very busy quarter from that perspective. Again, I think we played that game very well in the second quarter, so we have got a lot of practice. Now we need to play the same game, maybe even more intensely in the third quarter and the fourth quarter to protect 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 risen 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. It's difficult to say, but maybe it was because some competitors pulled back or put a brake 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 second quarter last year. I would say the second quarter last year was the anomaly, and then the competitors came back gradually during the third and fourth quarter. Now it's sort of back to normal, I would say.
Very good. Thank you. Last question here is on M&A activity. Can you remind us a little bit about your view on M&A activity? Do you see a potential for M&A already this year? Can you say anything about pricing? Can you tell us anything about your key focus areas for potential M&A?
M&A is part of our long-term plan. We have said that if we want to do an M&A, that it would be for something that adds something new to us. That could be a new brand, it could be a new insight, 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. The market is very fragmented and there is a lot to do. Obviously we are keeping an eye on potential targets out there. Right now, I think the focus is 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.
M&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 question.
Thank you.
Thank you once again. If you do wish to ask a question, please press zero on your telephone keypad now. Our next question comes from the line of Carl Deijenberg from Carnegie. Please go ahead, your line is open.
Thank you very much and good morning, Henrik and Tomas . 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?
No, we have clearly lost sales because of shortages. We see shortages both on external brands. There are certain brands that really struggle with their 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 as we see there is demand for. That's one part of it. The other one is that there are delays. There are delays on also our private brand side. Overall, in the second quarter, we're lacking high runners, and that drives traffic normally and drives sales normally. That is lost sales.
I understand. Could you provide any quantification or have you made any estimates what you have lost due to that in Q2?
No, we can say that we lost more in Q2 than in Q1. 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. We're actually ordering a little bit more and betting that we're not going to get everything right. In order to avoid being hit once again by facing stock shortages, then hence Q2 was worse than Q1, and we will avoid that in Q3 and get the most out of it. It's also obviously very important ahead of the campaign season then to get the stock in. Last year, as I said here earlier, we saw a little bit of an increase in September, and then fortunately we got in a lot in October last year, hence the foundation for a successful campaign season then.
We're doing all we can to avoid that.
Okay, perfect. Very clear. My second question is on the EBIT bridge here on slide 15. Talk about estimated COVID impact on EBIT of slightly more than SEK 50 million. Is there anything we should remember here going into Q3 and Q4 and maybe more specifically on Q4 than given that you're facing slightly tougher 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, the estimated effect relating to positive COVID effects for the full year 2020 was in the range of SEK 50 million. Right? We saw no material effects in Q1 or Q4. 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. The net out of those are the SEK 15. Consequently, based upon what I just described, it was higher than SEK 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 second quarter earnings call from Pierce. We will be back with the third quarter on 11th of November. Thank you very much.