Kicks AB (MATAS) Earnings Call Transcript & Summary

Hi, and welcome to this Matas Investor Call. [Operator Instructions]This call is recorded. I'll now turn the call over to your speakers. Please begin.

Thank you very much, operator, and welcome, everyone, to a call covering the acquisition of KICKS Group that we have announced today. And this is obviously a very big day for us at Matas. It is a transformational deal. It is a deal that is ultimately about being able to serve our customers better both in Matas, in KICKS, in Skincity by becoming a bigger and stronger company and becoming more competitive. That's what it's ultimately about. We will cover all the long-term aspects of this deal on our Capital Markets Day in due time once we've really gotten to know the company from the inside. Today, we will focus mainly on why we think this is a value-creating deal for shareholders in the near term. So welcome to this call. I'm joined by my good colleague, Per, CFO, and we will take you through the highlights of the deal and some specifics on the numbers. So we have signed the deal today. We are creating the Nordic market leader in the upper end of beauty and well-being market with this acquisition. We have paid an equity purchase price of almost DKK 700 million. The valuation on an enterprise value to EBITDA level is 4.7x excluding synergies and stand-alone improvements. We make a hard commitment today to deliver DKK 140 million in stand-alone improvements and synergies. This deal is fully debt financed. We will keep it -- keep our gearing within the existing range and the deal is expected to close in Q3 of the calendar year. So what is this combination. This is a deal of 2 complementary companies. Companies that have a lot in common. We are not identical, but we have a lot in common. And of course, this is about gaining a Nordic footprint and getting access to a much bigger market with a business model and a company that we know quite well and that we know how to run. So they are KICKS, as we are, a conventional retail company in the beauty sector, a specialist within beauty that has been through a digital transformation putting them in a position where around 1/3 of their revenues come from digital. They are like us, big believers in the omnichannel concept having both online and stores. They have a 3.3 million membership base in their KICKS Club. We have also found, and we have followed this company for many years and have had conversations and shared ideas with this company for many years. And we find that there is a very strong fit in terms of values and culture and how we believe in running the business, an incredibly passionate organization, a very capable organization. For the deal itself, we believe that it is a value-accretive deal for shareholders. We believe that there is a very clear synergy potential in merging and joining these 2 companies. It will put us in a position as #1 in Denmark, #1 in Sweden in the high end, #1 in Norway in the high end of the market and a contender in Finland. So a bit more about KICKS. KICKS is a group consisting of 2 banners, 2 main banners, KICKS and Skincity. They offer a beauty concept that covers makeup, fragrance, professional skin care, hair care, more focused towards the higher end of the market compared to Matas. They have 226 stores across the Nordics with the majority being in Sweden and the concepts are adapted to their local locations. So quite big flagship stores somewhere and small local stores elsewhere. So really adapted to the local market. They are a DKK 1 billion online player offering e-commerce online sales through kicks.se, NO and FI, and they run Skincity as an online-only proposition as well. Like us, they believe in the value of people, the value of offering advice and the value of offering an assortment that is unique and goes beyond what other players can offer. Skincity, a word about that, actually started out as a skin clinic, physical skin clinic, but turned into one of the great online journeys in Sweden, expanded into Norway. They are a specialist offering selective brands coupled with advice to customers and have recently been integrated into KICKS. I will come back to that. KICKS is opening a one warehouse, all channels, warehouse just outside of Stockholm. It is nearly fully invested by the seller. It will open in Q3 of the calendar year, and it doesn't change anything about our own plans to build the Matas Logistics Center. When it comes to assortment, Matas has around 60,000 SKUs. KICKS Group has around 25,000 SKUs and there is a quite big overlap in assortment. They focus, as I said, within makeup, face, fragrance, body, hair and other. We have in Matas a broader assortment and aimed more at the mass and mass premium market whereas KICKS is a more upmarket concept. They have 3.3 million members. And this is, of course, absolutely central to the deal and a key asset to acquire 3.3 million customer relationships and running a business based on having a club, something that we have been practicing and leveraging for years and years. So that is really a key asset in this transaction. When it comes to the brand portfolio, they trade a lot of international brands. There is a big overlap with the brands that they retail in their formats and what we retail in Matas, but they are also local and have local heroes in their brand assortment. Skincity being exclusively focused on skin care and brands with very selective distribution and KICKS having both selective, exclusive and semi-selective distribution brands in their portfolio. So of the DKK 140 million hard commitment that we're making today, DKK 40 million comes from 2 projects that KICKS Group is already now executing and have been executing. One is the integration of Skincity, which used to be run as a completely separate business, a completely separate location away from the KICKS business. They bought Skincity into the KICKS Group and formed the KICKS group in the fall of last year and made an integration whereby they keep all customer-facing activities, and they integrate the entire backbone, IT systems, people, all that you can integrate to keep delivering the same value proposition to customers, but taking out significant cost in the process. That integration is well underway. It has already migrated technically and a lot of changes have been made, and we're big believers in that transformation. The other big part is the new warehouse, and this is a case that is very similar to the case that we have been looking at for Matas. It is the establishment of an automated warehouse outside of Stockholm. KICKS coming from a different logistics setup than Matas, namely that they have been doing cross-docking and a lot more complicated logistics setup, not a centralized setup as we have. So they go to a centralized warehouse, which is much more efficient, and they go to an automated warehouse. The land and the building is leased and KICKS has already invested in the automation. So we take over that project and we are big believers, as you know, in those kinds of projects. So the combination of the business, what's happening with the combination. We are bringing DKK 4.5 billion to the table. They are bringing DKK 3.1 billion to the table in terms of revenue. We bring DKK 810 million on EBITDA level. They bring DKK 305 million to the table. We have an EBITDA margin of 18%. They have 1 of 10. And of course, that is our main focus to make sure that this transaction is improving their profitability, and it's a major driver for them to say that we need to be part of a different structure to be able to improve our profitability structurally. Almost 2 million club members with Matas, more than 3 million club members with KICKS, 2,100 employees with us, 1,700 with them. This is the -- these are the highlights of our strategy, and this we will return to in much more detail on the Capital Markets Day. But we believe that this changes in many ways, Matas as a case and as a business, positions us as the leading player in one stroke in the Nordic market, a much bigger market with much more headroom to grow for us. It positions us to go for long-term organic growth, but also inorganic opportunities could arise. We have learned over the last few years and so has KICKS that the business model we have, the integrated business model of having both online and offline having our own brands as well as third-party brands having retail media and retail together. That combination, when you are a market leader, can yield a business with superior profitability and cash generation. And then finally, we know the teams well. We have had very good access to management in this process and we believe that we are good management teams here at Matas, joining with strong management and very strong people within the KICKS Group. They have, like we have been through a digital transformation in rapid pace. And we have been following them almost neck to neck. So how do we intend to deliver value long term? We think there is potential for market share gains. We're not expecting a lot of market tailwind right now, but we do believe that there are significant opportunities for market share gains over the long cycle. We will, of course, use this opportunity to expand assortment, go into categories and bring some of our own brands and get more leverage on our portfolio of owned brands. We will use the scale that we have to deliver more value to our suppliers. We will be the most important customer for most of our suppliers. And of course, this is an opportunity for us to look at how can we add more value and make sure that we, at the same time, have the best terms. We also see that we can do a lot of different things, customer-facing, but there are a lot of things we can do together as a group and share as a group in terms of functions where we can take out the cost synergies over the long run. And then finally, while we're not using the same warehouse, we do believe that our logistics assets and our IT assets, in particular, we can leverage those across countries and across channels in the long term. But let's return to the short term because that is really where we are focused right now. We have made an in-depth study on what we could do together with the KICKS Group. We've had very good access to data, and as I said, very good access to the management team. And we have identified 8 value-creation levers, 8 areas where we believe improvements can be made, and profitability improvements, in particular, can be made. And then we have committed to a number of DKK 100 million EBITDA synergies arising almost exclusively from cost synergies. So in that number is not factored in the revenue synergies, if you will, or the revenue opportunities that you can imagine from this deal. These are hard synergies, cost synergies that we can point to. The 8 areas are assortment broadening, using and leveraging our omnichannel model, applying commercial excellence, pricing excellence and promotion excellence, working with the loyalty program together taking best practice from them, best practice from us. Then, of course, sourcing, we can do much more efficiently, shared services across the group, retail media, which is something we have been working on a lot in Matas, and we see a lot of opportunities in KICKS Group to build the retail media proposition. And then finally, of course, our logistics and IT. We do believe that not in the short term, but in the long term, there are opportunities in those areas as well. The DKK 100 million, we commit to phasing that in by the financial year '25, '26. And then I will hand over to Per to cover the financials and the terms of the deal.

Thank you, Gregers. And yes, I will take you through some of the details of the financials, but also the deal as such. So let's just start with the consolidated group as we put KICKS and Matas together. As you see from also the announcement, these are pro forma numbers. And what we actually mean by that is that we have now included as a financial numbers for KICKS 2022, '23 based upon them owning KICKS for the full period and then putting that together with the KICKS business. That's basically what we're doing from a pro forma perspective. Then there's a few elements that we are not including as they have been carved out of the deal like Skincity U.K., which was a former business, which is now being closed down. So all in all, this generates, as Greg has already alluded to a business above DKK 7.5 billion with an EBITDA of DKK 1.1 billion. EBITDA margin of 15% which is a combination of the 2 businesses as already alluded to. From an EBIT perspective, almost DKK 500 million and an EBITDA margin of 6%. If we then look at the business had it been part of the majors group in the past, we would have been looking at a growth year-on-year of 5% for the financial year '22, '23. So let me take you into some more details in terms of the overall deal and the way to closing. As of today, we signed the agreement to acquire the 100% shares of KICKS Group. The deal is fully debt financed, and I'll come back to some more details on that. And of course, the transactions, as I already mentioned, it includes the full operation in Sweden, Norway and Finland and thereby, we will be covering the full Nordic. We have paid SEK 1.1 billion in equity, which is equivalent to just below DKK 700 million. And when then we look at the enterprise value, we look at a slightly above SEK 2 billion or DKK 1.3 billion and that includes actually DKK 900 million or DKK 960 million of lease debt in the Swedish business, just applying the IFRS 16 principles. So what does that mean from a multiple perspective. When we look at our multiples on this deal, it's 4.7x the EBITDA to enterprise value and this is before any synergies or any stand-alone improvements. We have also included the number as 4.1x, which is the multiple when we include the stand-alone improvement as Greg has just went through, which is basically the Skincity integration, which has already taken place, and it is a supply chain transformation, which is about to take place as we speak. So those -- when we take those into account, we are looking at a pro forma enterprise value to EBITDA of 4x. From a financial perspective, we are -- as Gregers went through, we are looking at DKK 40 million of the stand-alone improvements on Skincity and the supply chain and a minimum of the DKK 100 million improvement from the synergies in 2025, '26. In addition to all that and putting the 2 companies together, there will be integration costs, and we have estimated that in the range of DKK 100 million, and that will majority be in the first financial year that you will see those costs. This will, of course, be treated as a one-off cost special item, but you will see more of that once we come back at the Capital Market Days in terms of the full outline of our plans. In terms of EPS, we will already see EPS accretion by '24, '25. And then when we get to '25, '26, we will be looking at a double-digit accretion. So closing of the deal, we expect that to happen in Q3. So not a long period for closing as the transaction is not subject to any regulatory approvals. And with that, I just want to get back to the financing of the deal. On the left side, you will see the stand-alone debt from KICKS and Matas which is roughly DKK 2.3 billion, of which DKK 1.2 billion, DKK 1.3 billion is debt coming from the IFRS 16, basically accounting for the leases. When we then add the acquisition, a debt which is basically the acquisition plus acquisition cost. We get to a total debt around DKK 3.1 billion, which is within the range of Matas' guidance on debt between 2 and 3 and the other end, of course. But when we then look at the deleveraging that will take place over the next couple of years, 2 to 3 years, and we will see a deleveraging to the lower end of the range by '25, '26. And with that, also, we have basically maintained our capital allocation policy which will basically continue to be either dividend or share buyback at least 20% of our adjusted profit after tax. In terms of the debt suppliers, we have been able to keep the existing facilities we have in place of roughly DKK 2 billion without any change of terms and they run for another 3 years until August '26. Then we have, together with the club put together a bridge loan of DKK 500 million, which will make sure that we get through the transaction, and that will then be converted into a club deal post closing. And with that, I think hand over to you, Gregers, to talk about what's going to happen from now on?

Yes. Thank you, Per. So what's happening now, we are signing today. We have our AGM this afternoon. On August 16th, we will be announcing our Q1 interim report for Matas. We expect closing in Q3 of the calendar year and then we will host a Capital Markets Day in due time once we really have gotten to know KICKS from the inside and have full clarity on our longer-term plans and ambitions, and that's also when we will announce long-term financial ambitions. So those are the next steps. So finishing off, we think this is exactly the right deal for Matas to create a new future for Matas and a more attractive future for Matas actually for all our stakeholders, both our customers, our suppliers, our colleagues who will be part of a bigger group. And of course, we believe that this is a value-creating deal for investors as well. It will position us as the clear market leader in the upper end of a very big market of DKK 65 billion across the Nordic. We will have 5 million members across the base that we can address through online and offline channels. And increasingly, we will be running that business on a shared platform. So this -- we're hoping and committing to will be a deal that unlocks new opportunities to grow profitably in a wider range of geographies and a wider range of categories and lines of business. And at the same time, we see significant cost advantages. So this will make us ultimately a more competitive business. And with that, I will be very happy and we will be very happy to take questions. Over to you, operator.

[Operator Instructions] The first question will be from the line of Poul Jessen from Danske Bank.

Yes. And congratulations, at least from what I've seen, it looks interesting. Could you say something about the growth of the company, both online, offline in the recent years?

Yes. As you know, the recent years have been like nothing else. So it's been COVID affected in Denmark, COVID affected in different ways across the 3 Nordic markets. So going back to the time before COVID and comparing to now, KICKS Group has delivered the same kind of growth that Matas has. And as you know, we have delivered around 6% growth yearly over that period. And that, of course, been once quite nicely to what KICKS Group has been able to do. So in that regard as well, they are quite similar to us. It's a similar journey that they've been on with different COVID restrictions.

And is the online/offline profitability similar to what you're doing?

So we will get back to all those questions on the Capital Markets Day, but they have seen the same kind of transformation of the business, namely that -- with scale of the online business, of course, profitability growth. And as you can tell, their overall profitability is lower than Matas and they need a structural move like this to fix that. But our impression both from following them through the years and from having had a closer look to our data is that they have been executing solidly on the same kinds of plans and ambitions that we have in Matas.

I have 2 more on the financials. Can you say something about the gross margin of the group? And what kind of cash flow they are delivering?

So we will disclose those numbers at a later stage, not today.

Okay. Then in Sweden, you have some larger online competitors like [indiscernible], how is KICKS position in online?

So overall, if you look at total revenues in KICKS segment of the market, they are #1 online and offline. It is a different competitive set, as you mentioned, in Sweden, also in Norway. So KICKS is a contender. It is a much more equal playing field than it is in Denmark where Matas has a unique position and this is obviously an area where we think there's more work to be done. It is respecting that it is a different market.

Okay. Then I have one more and then I'll step back -- about strategy, you have -- since the IPO had a strategy of more or less being a Danish operation than you are transformed into and omnichannel. Now you do this acquisition. Should we see this as Matas in general becoming more ambitious international? Or is this a onetime? Or is this the base on which you should grow wider, more international in the future?

So this is, for sure, a conviction that the beauty business that Nordic consolidation is a good thing for us to be a driver in the Nordic consolidation. We will have our hands full with this deal. We have a very clear view of what needs to get done, and we have high hopes for what we can do long time with this group. So that's going to be our priority for the short term and near term.

Thank you, Poul. The next question will be from the line of Mads Quistgaard.

I will take them one by one. I have 2 questions, and I will take them one by one. So first, a question on competition, going back to Poul's question. If you look at the markets, Norway, Sweden, Finland, obviously, Norway, boost is dominating that market. So what is your focus right now? Is it to focus on both Finland, Norway and Sweden? Or is it to sort of increased penetration on all the different markets at the same time?

That is a question we will get back to once we have the long-term strategy, once we have the Capital Markets Day. For now, our focus is on the agenda that we have outlined today and securing that we meet our hard commitments on the '25, '26 synergies and stand-alone improvements. So questions related to strategy is a matter for our Capital Markets Day.

Fair enough. Makes sense. Then I have another question. So how should we see this story with KICKS now? So I guess if you look at Matas, Matas has growth story today, you will have this target to reach plus DKK 5 billion revenue in '25, '26. Obviously, you can do much to the margins and KICKS right now from the synergy potential. But going forward, is this also a growth story? Or is it about getting leverage on the margins?

So for now, for the short term, our priority will be profitability for the KICKS Group and also, of course, doing all those things we can to better serve the Swedish, Norwegian, Finnish customers by bringing the Matas capabilities and the KICKS capabilities together, so that's going to be our focus for the near term.

Okay. And you'll give us more comments on the long term on the Capital Markets Day, I guess.

Yes.

The next question will be from the line of Sebastian Grave from Nordea.