Pierce; interim report January – March 2022 and update of the financial calendar

January – March 2022

• Net sales increased by 14 percent, totaling SEK 420 (369) million. In local currencies growth was 10 percent.
• EBITDA totaled SEK 1 (19) million. Adjusted EBITDA was SEK 1 (29) million, equivalent to a margin of 0.1% (7.9%).
• Operating profit (EBIT) was SEK -12 (8) million. Adjusted operating profit (EBIT) was SEK -12 (18) million and the adjusted operating margin was -2.9% (4.9%). The decline was primarily due to the high shipping costs from Asia, a lower gross margin level and increased costs for online traffic-driving marketing activities.
• Cash flow for the period was SEK 14 (345) million. The comparative period’s cash flow was impacted positively by the previous year’s listing.
• Profit/loss for the period amounted to SEK -14 (0) million.
• Earnings per share before dilution was SEK -0.36 (0.01) and SEK -0.36 (0.01) after dilution.

Significant events after the end of the quarter

• The Board of Directors has decided to undertake a new share issue, planned for the second quarter 2022, up to SEK 350 million, with preferential for the existing shareholders, subject to approval by an extraordinary general meeting. The purpose of the new share issue is, given the uncertainty in the external environment, to reduce Pierce’s leverage ratio, increase Pierce’s interest coverage ratio and to continue with the long-term growth strategy, as well as to undertake measures to increase profitability. The Company’s largest shareholder, Procuritas, has stated its support for the share Issue, as well as its intention to subscribe for its pro rata share. For more information, see section ”Comments to the Group’s financial position”.

Update of the financial calendar
As a result of the interim report being published on the evening of the 10 May 2022 (instead of the 11 May 2022 as previously stated in the company’s financial calendar), the publication of the company’s annual report 2021 is advanced from 12 May 2022 to 11 May 2022. The updated financial calendar is available via www.piercegroup.com,.

CEO’s COMMENTS
A terrible war is taking place in Europe and we feel for all of those who have been, and are, suffering in this conflict. I want to express a huge sense of gratitude, in particular, to our employees in Poland who are in many ways helping the unfortunate victims of this tragic situation.

We have not been directly impacted by the developments in Ukraine and Russia but, of course, have been indirectly affected as the level of concern and uncertainty effects both demand and product offerings. The market has been impacted by this war and we have also seen the continued effects of the pandemic. In the first half of the quarter, the market was on level with the previous year but during the second half we saw a clear negative downturn. During the quarter, the costs for shipping and raw materials continued at a high level. The most important message is that we have decided to do undertake a rights issue.

We mainly intend to use the net proceeds from the Rights Issue to reduce our indebtedness. This would place us in a better position to manage well-known industry challenges, such as previously communicated increases in costs for raw materials and freight, as well as supply-chain disruptions. The Rights Issue also improves our ability to manage other unpredictable future events.

A focus on growth but profitability under pressure
Given the declining market conditions during the quarter, it was necessary for us to take action by driving sales even more intensely and by reducing the inventory and, as a consequence, reduce our net debt. This resulted in improved growth and increasing market shares, but it also reduced profitability for the quarter.

Net revenue amounted to SEK 420 million, an increase of 10 percent in local currencies. This is equivalent to an average annual growth rate (CAGR) since Q1 2020 of 17 percent. The online market benefited from pandemic restrictions in Q1 last year and the increasingly worrying external environment negatively affected consumer behaviour, resulting in a decrease in the market during the quarter. We continue to see only limited rises in consumer prices, in spite of large cost increases in the value chain; this is something that presses our gross margin.

We started the quarter with a high inventory level after lower than planned sales during the campaign-intensive Q4. Our main focus has been on stimulating sales in order to decrease the inventory and net debt. In conjunction with the weakened market during the second half of the quarter, we further increased campaign activities and investments in marketing. The aim was to counteract the risk of breaching our financing covenants. Lower inventory levels will also improve growth premises, now, during the forthcoming quarters through the enhanced possibility of optimising the assortment.

The growth in traffic on our sites was impacted by market developments and was negative, while price reductions, in particular, improved the conversation rate. This, together with an increased average value per order, drove the growth in net revenue. We noted continued record levels as regards customer satisfaction, which drives a positive development in terms of repeat customers.

Growth at a good pace within Onroad
Compared with Q1 2021, Onroad grew in local currencies by approximately 30 percent and Offroad, facing a strong comparative quarter, increased by approximately 6 percent. The high level of growth within Onroad was driven mainly by an increasingly strong assortment and more competitive prices. This meant that we received almost 20 percent more new Onroad customers during the quarter compared with last year.

Our focus on driving sales implied pressure on margins due to increased campaign activities, cost savings which were not transferred to customers and increased investments in marketing. Adjusted EBIT totaled SEK -12 million, a clear decline compared with SEK 18 million in Q1 2021. The adjusted EBIT margin sank by 7.8 percentage points to -2.9 percent. The most important factors behind this development were:

• Higher shipping costs from Asia, SEK -21 (-13), equivalent to -1.5 percentage points.

• Other gross margin items, primarily reduced prices to customers and higher purchase prices, equivalent to approximately -5.4 percentage points.

• Increased variable costs primarily associated with marketing to drive traffic, equivalent to -2.0 percentage points.

• Overhead costs decreased in relation to net sales by 1.1 percentage points.

Since the end of the fourth quarter of 2021, inventories decreased, and net debt thereby declined from SEK 160 million to SEK 138 million.

Continued uncertainties in the near future
The external environment is characterised by a major degree of uncertainty and the challenges we have experienced in recent quarters, with a weak market and cost increases, are expected to continue in the near future. The demand in the online market continued to be weak at the beginning of the second quarter and we also see a risk for a return to shortages of goods in certain categories going forward, due to raw material shortages, production and distribution disruptions.

Uncertainties and the threat of inflation can impact our customers’ wallets, but we believe we are well positioned to meet these challenges. A significant portion of our customers are passionate motorcycle riders both on the road and when they are not riding. Enjoying their hobby or travelling to work will continue to be a prioritised expense item and, with our broad assortment and price-worthy products, we can continue to serve the more price-conscious customers.

Price increases within certain segments
It is now high time for the market to secure an upward adjustment of prices to compensate for the strong cost increases hit by all of the players in the industry. As mentioned, to date, we have seen only limited increases in consumer prices in the market. This is probably due to a combination of high inventory levels, a declining online market, and that our industry is very fragmented at both the supplier and retail level. After a first quarter with the focus entirely on growth, we have now, at the beginning of the second quarter, raised prices within certain segments and, thereby, transferred cost increases to the customers to improve profitability. It is still too early to say how the market will react to these adjustments and we may need to revise this tactic.

Preferential rights issue to strengthen the balance sheet
Pierce credit facility is subject to, among other things, financial covenants. The external environment, in combination with our plans to promote long-term successful business operations, can imply challenges in order to comply with these covenants. As a result, the Board of Directors has decided to undertake a preferential rights issue up to SEK 350 million, planned to take place during the second quarter 2022. The aim is, given the factors of uncertainty in the external environment, to reduce Pierce’s leverage ratio, increase Pierce’s interest coverage ratio and to continue the long-term growth strategy, as well as to undertake measures to increase profitability. The Company’s largest shareholder, Procuritas, has stated its support for the share Issue, as well as its intention to subscribe for its pro rata share. For more information refer to the section “Comments regarding the Group’s financial position”.

Continued premises for long-term profitability
In spite of this, there is all reason to be optimistic about the future. If we look as far back as Q1 2019, which is the most recent comparative quarter not affected by the pandemic, we have an average annual growth rate of 16 percent, which is on level with our long-term target, Motorcycle sales in Europe grew by 8 percent in 2021 and, together with a long-term shift in sales channels from physical shops to online, and an expected normalisation of price levels, we see continued good possibilities for long-term profitable growth.

In terms of profitability, we are of course not satisfied with today’s situation. We deem that many of the macro-economic challenges we are facing are temporary and that market growth will return. In addition, consumer prices should adapt to the cost levels in the industry. Our major long-term profitability driver is the scalability of the operations and we work continuously with measures to increase the efficiency of our fixed costs. For instance, compared with Q1 2019, we have slightly fewer employees who handle about 60 percent more in sales, if we exempt our personnel working in the warehouse. As a result, overheads have, to date, decreased from 21 percent of net sales in 2018 to 15 percent. But we need to do more. Therefore, we have worked with a number of major process enhancement projects with the aim of securing further improvements in efficiency for some time. During Q2 we will significantly accelerate this work to adapt the level of our future costs and of working capital tied up. This will be done in order to ensure profitability and a positive cash flow.

Currently, we are facing headwinds but we are working to exit this situation with a stronger position when the winds subside. We will do this through a continuous improvement and sharpening of the offering, in particular within Onroad. For example, during the quarter, we entered into agreements with new brands, amongst others, Rizoma, Answer and EVS. In addition, we launched 20 new products within our private brands. We also launched mountain bike products in order to be able to serve many of the motocross riders who are interested in cycling. During recent months, we have also had the premier of our new campaign format in which we offered Onroad customers a whole set of clothes at attractive prices, which was a huge success.

Product launches and campaign updates are just a few of the examples of all of the improvements our staff undertake every day to strengthen our position as Europe’s leading e-commerce company within our niche.

Stockholm, 10 May 2022

Henrik Zadig
CEO, Pierce Group AB

For further information, please contact:

Henrik Zadig, CEO
Email: henrik.zadig@piercegroup.com
Tel: +46 73 146 14 60

Tomas Ljunglöf, CFO
Email: tomas.ljunglof@piercegroup.com
Tel: +46 73 378 01 54

About Pierce Group
Pierce is a leading e-commerce company selling gear, parts and accessories to riders across all of Europe via some forty websites adapted to local markets. Pierce has two major segments, Offroad – sales to motocross and enduro riders, and Onroad – sales to high road riders. Pierce also has a smaller segment, Other, which primarily focuses on sales to snowmobile riders. With a large and unique product assortment, including several private brands, an excellent customer experience and attractive prices, Pierce is changing the motorcycle enthusiast market in Europe. Headquarters are located in Stockholm, the central warehouse is in Szczecin in Poland, and, in addition, the major portion of our customer support services is located in Barcelona. The Company has approximately 430 employees.

This is a translation of the Swedish original of Pierce Group’s interim report for the period 1 January – 31 March 2022. In the event of any discrepancies between the two versions, the original Swedish version shall apply.