Matas A/S

CSE:MATAS

Earnings Call Transcript 2019-Q3

[Operator]

Ladies and gentlemen, thank you all for standing by, and welcome to today's Q3 report 2018/2019. [Operator Instructions] I must advise you all that this conference is being recorded today, Thursday, the 7th of February 2019. And without any further delay, I would like to hand the conference over to your first speaker for today, Mr. Gregers Wedell. Please go ahead, sir.

[Gregers Christian Wedell-Wedellsborg]

Thank you so much, and good morning, everyone. Welcome to our presentation covering the third quarter of the 2018/'19 financial year. With me is Anders Skole-Sørensen, our CFO; and Elisabeth Klintholm, Head of IR and Corporate Affairs.I will start out with a few high-level comments on the quarter, after which Anders will take you through the numbers, the Q3 numbers. And finally, I will talk a bit about our strategic progress and the initiatives that we've launched in the quarter. As usual, we will end with the comments on the outlook for 2018/'19 and finally, a Q&A session. Please turn to Slide 2. The quarter overall was in line with our expectations and increase is characterized by a good strategic progress on a number of areas. We completed notably the acquisition of the Firtal Group on November 13. It's a transaction that more or less doubles our online turnover compared to the full year 2017/'18. For the quarter overall, we increased turnover and continued high organic growth rates on digital. And we were able to also drive positive like-for-like growth in the quarter. Earnings, as you know, were down because we have decided to fast-forward our digital action plan growth and decided to add more resources to digital to be able to drive future growth.Let's have a closer look at the numbers. Revenues for the quarter came in at DKK 1.0926 million -- billion, an increase of 1.7% compared to last year. The majority of the increase came from the acquisition of Firtal. Revenue from Firtal is in the numbers from November 13. Like-for-like growth reached 0.5% for the quarter, up from a decline of 0.8% in Q3 last year. The growth was driven by a strong development in the online sales on matas.dk, which reached 55% for the quarter. We are quite satisfied with this continued high growth on matas.dk. And we have, as I mentioned, allocated more resources to this area in the quarter. Earnings came in at DKK 206 million, a decline from DKK 227 million last year. And this decline was driven by a proactive decision to invest more in online and also be competitive on our campaigning. The EBITDA margin before special items reached 18.8%, down from 21.1% last year. And the margin, EBITDA margin was 17 point -- 16.7% year-to-date, which was well in line with our guidance for the year, an EBITDA margin in excess of 15%.And with that overall instructions for the quarter, I will ask you to turn to Slide #3 and hand over to Anders for a deeper look into the financials.

[Anders T. Skole-Sørensen]

Well, thank you, Gregers. Let me begin by giving you a little bit more detail on the revenue development. As Gregers mentioned, revenues increased from DKK 1,075 million to DKK 1,093 million. And it was driven primarily by the Firtal acquisition and continued strong growth online. If we look at the specific areas, sales of Beauty products grew 0.6% year-on-year in the third quarter, driven by increased sales of High-End Beauty while our Mass Beauty declined due to the continued competitive pressures specifically on cosmetics. The Vital area sales increased by 19.4% year-on-year. And of course, that was primarily due to the acquisition of Firtal but also driven by fairly strong sales and strong campaigns in the quarter. Sales in the Material area decreased 4.4%, driven by a reshuffling of campaigns and intensified competition. Finally, MediCare dropped by 1.9%, primarily due to lower sales of nicotine gum as competition from supermarkets and discounters intensified in that specific area. The gross margin came in at 44.0%, or I should say 44% in the third quarter, which was down from 45.0% last year. The decline was, as Gregers already mentioned, primarily due to our decision to invest in competitive campaigns in the quarter. Total costs, excluding special items, rose by 6.9% in the quarter compared to the same quarter of last year. The increase came both from other external costs and from staff costs. And I will revert to this in more detail a little later.Following the decline in gross margin and the increase in cost, EBITDA before special items was, as mentioned, realized at DKK 206 million against DKK 227 million in the same quarter last year. Lower gross margin and the increase in costs led to a drop in adjusted net profit to around DKK 140 million in the quarter compared to DKK 155 million last year. Free cash flow was DKK 127 million, which is a marked drop from the DKK 237 million generated in the third quarter of last year. But of course, the free cash flow was negatively impacted by the acquisition of Firtal Group. Cash flow from the operating activities were actually slightly higher than last year.If we look at the number of transactions in our stores and online, they fell by 1.3% in the quarter compared to the same period last year. But on the other hand, we continued to see a growth in the average basket, which was up by 2.5% or slightly above DKK 4, that's DKK 4.4 per transaction. With that, please turn to Slide #4. On Page 4, you can see the sort of longer-term development in revenue growth, gross margin, EBITDA margin and the level of inventories. As Gregers already mentioned, the quarter had a positive underlying like-for-like growth of 0.5%. However, if we look at the 12 months' trailing like-for-like growth, it remains in negative territory, although the decline is tapering off. If we look at gross margin, the 12 months' trailing gross margin declined 0.3% in the quarter from 44.9% at the end of the last to 44.6%. Long-term trend for the EBITDA margin before nonrecurring items remains negative with a decline of 0.7% from 16.1% to 15.4% in the quarter.Finally, if we look at our inventory level at the end of Q3, it was a 900 -- just above DKK 900 million, which was frankly too high and not in line with our expectations. The increase was partly driven by the acquisition of Firtal, which added roughly DKK 30 million to the numbers, but also an increase in the number of SKUs we stocked and also a few new stores. In the quarter, this quarter we're in right now, we have initiated plans to curb inventory levels.With that, please turn to Slide #5. As we've already covered the first few lines, let's start with just a closer look at costs. As I already mentioned, total costs, excluding special items, rose by 6.9% in the quarter compared to the same quarter of last year. Other external costs rose by 9% year-on-year, driven by increased marketing costs, primarily from the addition of marketing costs from Firtal Group. But also the high growth in online sales led to an increase in fulfillment costs while we actually had a slightly positive impact from lower rents.Staff costs rose by 3.2%, primarily driven by increased costs related to the online business, that's both Firtal and matas.dk. In the quarter, there were also some costs related to redundancies that we made. Special items declined, you can't actually see that here, but you can see it in one of the previous pages, declined to DKK 1.3 million from DKK 5.5 million in the third quarter of last year. That quarter was -- the number was higher because we closed off StyleBox and 4 Matas stores. If we look at the effective tax rate, it was unchanged at 22% in the quarter. Profit for the period after tax came in at DKK 122 million, which compares to the DKK 134 million in Q3 of last year.With that, please turn to Slide #6. In Slide 6, we look at cash flow development. And as you can see, cash generated from operations amounted to an inflow of DKK 337 million in the third quarter, slightly higher than the year before. CapEx and investments stood at DKK 139 million, which is an increase of DKK 116 million from the same quarter of the year before. As already mentioned, the main reason was the acquisition of Firtal, which was completed in the quarter and resulting in a payment of DKK 111 million. As a result, the free cash flow was DKK 110 million lower than in the same quarter before and free cash flow stood at DKK 127 million in the quarter.With that, please turn to Slide 7 for a look at our progress on strategic initiatives, which I will leave you to do, Gregers.

[Gregers Christian Wedell-Wedellsborg]

Thank you, Anders. As for the strategy Renewing Matas, we are very pleased with the progress in this quarter. We have made progress on every single 1 of the 5 tracks in our strategy. We have headlines on this slide. And if you turn to Slide #8, I will dig into the first one, which is live our purpose. So in the quarter, we have continued our successful rebranding campaign or revitalization campaign of Matas. And we have been preparing our 70th anniversary, which will take place over the next quarter. We are -- have been in preparation mode with the new store concept. And actually today, we are unveiling a range extension of our private label brands, the Stripes, a new design and a range extension. We're very happy to see that out to the market.If you please turn to Slide #9, online, as we already mentioned, we continue to see this strong momentum from the strategy that we launched earlier last year in digital. For the 9 month up to the third quarter, we have been growing 54%. And that has made us move forward the growth plan for digital and add more resources to digital so that we can continue to win market share in that space.If you please turn to Slide #10. With the stores, we have been working in the engine room and as we have told you before, before the summer, we will be unveiling our new store concept. We look very much forward to that. And besides redesign of the store and rethinking the entire store experience, we are also doing a lot of changes to the assortment and to how we operate the stores and also working actively with the store network.If you please turn to Slide 11 on the strategic track on growth. On the Capital Markets Day, we announced that we would aim for winning a bigger share of the green market. And we have, primarily due to the acquisition of Firtal, delivered 19-plus percent growth in Vital in Q3 and made a step-change on that particular track. So there as well, we are pleased with the progress. If you please turn to [ Slide 12 ], change how we work. We have made some changes to management. We have a new Chief Commercial Operator onboard from October 1. She will focus on category management, on pricing and promo and on our processes to make our commercial processes more lean and effective. We have also brought onboard, starting January 1, a new Supply Chain Director with a very strong track record in retail and lots of different fields in retail. His focus will be on inventories but also on thinking ahead on our omni-channel fulfillment and our capacity to deliver both to the stores and to direct to the consumer. And then finally, we have continued -- as you can tell from our accounts, we have continued our focus on operating our stores even leaner in this quarter.If you please turn to Slide 13, our guidance for the year. Revenue guidance, we have an unchanged level for the underlying revenue for this financial year compared to last year. And we have a specification that we expect the like-for-like growth to be between minus 0.5% to plus 0.5% compared to the previous guidance of plus 1%, minus 1%. We are, up until the end of the Q3, at 0% like-for-like growth for the first 9 months. We expect EBITDA margin, maintain the guidance on EBITDA margin before special items to be above 15%. We are currently at 16.7% for the first 9 months.As for CapEx, we maintain the same guidance as before, CapEx in the range of DKK 110 million to DKK 130 million, and total investments, including the purchase price for Firtal, between DKK 240 million and DKK 260 million. Finally, we reiterate that we will expect to pay a dividend for this financial year. And as stated in the Q3 report, Firtal Group has been included in our account from closing, meaning that Firtal will be fully in our Q4 numbers.Please turn to Slide 14. And with that, we have concluded our presentation, and we are ready to take your questions. I will hand over to you, operator.

[Operator]

[Operator Instructions] And we've got two questions on the line. First question, it comes from the line of Michael Rasmussen.

[Michael K. Vitfell-Rasmussen]

Michael here from ABG. So firstly, if you could discuss a little bit on the stores. Is it right to assume that you opened 2 stores during the quarter? I think that you also left out the normal talks about stores in the release. And staying on the stores, if you could please tell us how the development has been in Nature or Matas Natur stores so far, if you could talk a little bit about the number of stores that you plan to refurbish or upgrade in the fourth quarter, including costs on that. And then also if you could -- if you're planning any closures of stores going forward.

[Gregers Christian Wedell-Wedellsborg]

Okay. Thank you, Michael. As for new store openings, you'll find it on Page 7 of 22 in the report. We're opening one -- we have opened one new store in Ølby and we have expanded one store in Vanløse. And that's for the quarter. Development in stores, sales was slightly down in stores. But we don't give out the specific numbers on that. As for the...

[Michael K. Vitfell-Rasmussen]

But Gregers, when you say slightly down, is that for Matas Natur, the nature stores that you're talking about or...

[Gregers Christian Wedell-Wedellsborg]

That's for the overall. Matas, we don't give the information on Matas Natur. And we -- so I think Matas Natur, we are very happy with the overall progress of the Matas Natur initiative. We have no plans and we have had no plans of expanding the 2 stores. They serve a very specific purpose of both a marketing purpose but also a purpose of being able to source new brands and experiment with the customer experience and the target group that is interested in Matas Natur. And what we will use those 2 stores for is to -- the learnings that we have from those 2 stores, we will take the best part of that into our new Matas. But we have no plans of expanding the Matas Natur stores at this point.

[Anders T. Skole-Sørensen]

And yes, I think just to add, I mean, they are insignificant in the big picture so that you don't need to worry that they are sort of making big owned accounts.

[Gregers Christian Wedell-Wedellsborg]

That's a good point.

[Anders T. Skole-Sørensen]

Very insignificant.

[Michael K. Vitfell-Rasmussen]

And on the refurbishments?

[Gregers Christian Wedell-Wedellsborg]

As for the refurbishment rollout, we don't give out any specifics other than what we've said already, that we will be opening the first stores in the new concept before the end of the financial year. But we don't give out any numbers or details on the overall rollout plan.

[Michael K. Vitfell-Rasmussen]

Great. Talking about your staff costs, now with you hiring in a new CCO and a new Supply Chain Director. And in general, I understand that the IT guys are a little bit pricier than your normal store staff. Should we expect staff costs to come up slightly in the next couple of quarters?

[Gregers Christian Wedell-Wedellsborg]

The management changes, they have been direct changes of management and getting new management onboard. So on that specific accounts, no. But you see in the quarter that we add resources to fuel specifically our online and to sustain a high growth rate online. Yes, you should expect something. In parallel with that, we have efficiency programs to make sure that our headquarter cost is kept in control.

[Anders T. Skole-Sørensen]

But generally, Michael, we can't really discuss what the coming quarters because that would be like guiding through the backdoor and we're not going to do that.

[Michael K. Vitfell-Rasmussen]

On the net working capital for development, obviously I heard you say, Anders, that you will be looking into the inventories. But just kind of thinking conceptually about this. As you grow online, what will this mean to your inventories and also receivables going forward? I would assume that the inventories would go up, but at the same time, your receivables would decline.

[Anders T. Skole-Sørensen]

I don't think it's going to have much of an impact on the receivables, to be honest. I mean, sales online are just like cash sales. There's not really a big difference. And as to level of stores -- of stocks or inventory, it could be argued obviously, as we have been arguing, that to some extent, when we are expanding the number of SKUs that we operate, that has an impact on inventory levels. However, it should also be noted that you can do so online rather more cheaply than if you do it in the stores. So it's much more expensive to introduce a new brand in stores than it is just to introduce it online. So the effect is rather small. I mean, yes, it's -- there is the effect of when you grow the business, of course, obviously there's some kind of risk that you might grow your inventories a bit. But there are also some other factors at work here. And obviously, as we pointed out, the inventory level at the end of Q3 was basically too high for our liking. And we have set concrete actions in place to make sure that we will curb inventory levels in the quarter we are in right now.

[Operator]

[Operator Instructions] Our next question comes from the line of Poul Jessen.

[Poul Ernst Jessen, Senior Analyst]

A few questions about this other cost and the staff cost...

[Anders T. Skole-Sørensen]

Paul, could you...

[Elisabeth Toftmann Klintholm, Head of Investor Relations & Corporate Affairs]

We can barely hear you.

[Anders T. Skole-Sørensen]

Get a little bit closer to the mic. Yes, that's good.

[Elisabeth Toftmann Klintholm, Head of Investor Relations & Corporate Affairs]

That's better. Thank you.

[Poul Ernst Jessen, Senior Analyst]

Okay. Questions were about the staff cost and also external costs, which year-over-year was -- [ have ] a lot. But it can't be Firtal, all of it, given the revenue levels of Firtal. So can you say something about the recurring nature of these additional costs for online, fulfilling and marketing and so on, looking into the coming quarters? That was one question. Then on Firtal, can you say something about seasonality on the business? I would assume that it's more stable and less cyclical or seasonal than the rest of the business. And then you have severance payments mentioned. Is it material? Or is it just something you have to mention?

[Anders T. Skole-Sørensen]

Yes. On the online costs, there is no doubt as we grow the online business as aggressively as we have been doing, there are some fulfillment costs that are carried through in the system. And that will affect numbers. And obviously, that's something that if you have a -- if you forecast very high growth online, you will also have to take that into consideration basically because there are some costs associated with the picking and packing and so forth of the goods there. So there is a direct link. As to the cost associated with people there, we mentioned that because it's -- Is it a significant number? Not in the greater scheme of things. But with respect to that particular line, cost line, yes, you can see there's a difference. And it's part of the explanation. And whether or not that will be of a recurring nature, yes, some of it is a recurring nature, as you know. But it also will have swings from quarter-to-quarter. That's the nature of the game.

[Gregers Christian Wedell-Wedellsborg]

And you were right in assuming that Firtal is less seasonal than the rest of the business.

[Poul Ernst Jessen, Senior Analyst]

Okay. And then you talk about increased competition in the Material segment. Is that supermarkets that's pushing that?

[Anders T. Skole-Sørensen]

It's both supermarkets and our friends from Jutland as well.

[Gregers Christian Wedell-Wedellsborg]

So you know there's -- a lot has happened in that area. So we just see there is some increased competition. We do see some online movement as well in that space.

[Poul Ernst Jessen, Senior Analyst]

Okay. And I guess, you don't want to give more insight into the Firtal impact on the different cost lines.

[Anders T. Skole-Sørensen]

No, that is correct.

[Poul Ernst Jessen, Senior Analyst]

Or the gross margin, how it's impacted at all. Do they have gross margins in line with the rest of the business?

[Anders T. Skole-Sørensen]

We don't guide specific on that gross margin. As we say, we are looking at a business that has a -- that we're looking to have an EBITDA margin of more than 11%. But that's about as far as we're going to go. In the greater scheme of things, it's not really going to make a difference if they have 1% higher or lower gross margin, to be honest.

[Operator]

[Operator Instructions] No further question at this time. Please continue, sir.

[Gregers Christian Wedell-Wedellsborg]

Thank you so much for taking the time today. As always, you can reach out to Elisabeth if you have further questions. Have a nice day. Bye-bye.

[Elisabeth Toftmann Klintholm, Head of Investor Relations & Corporate Affairs]

Bye.

[Anders T. Skole-Sørensen]

Bye.

[Operator]

Thank you. This does conclude your conference for today. Speakers, please stand by. Participants, you may all disconnect. Thank you for joining.