Matas A/S (MATAS) Earnings Call Transcript & Summary

Hello, and welcome to Matas Q1 conference call. [Operator Instructions] This call is being recorded. I'd now like to introduce CEO, Gregers Wedell-Wedellsborg; and CFO, Per Johannesen Madsen. Please begin.

Thank you, operator, and welcome, everyone, to the call, our earnings call for the first quarter of the financial year. And it's been a good start to the quarter, but it's also a quarter of more symbolic importance because we are approaching the 2-year mark of our acquisition and integration of KICKS in Sweden, Norway and Finland. So our agenda for today is that I will make some comments on where we are on the grander time line of the Wind the Nordics strategy and then point out a few areas of our strategy where we are making progress. And then I'll hand over to Per to cover the financial results in more details before we open for Q&A. . And really, this is to us, the central message of the announcement that we've made today that 2 years into the acquisition of KICKS Group, we now enter a new stage of the Wind the Nordics strategy. For the last 2 years, we have been focused on growth and we have been focused on integration, and really getting the 2 companies together and driving out synergies and the biggest investment program in our history, building and opening 2 automated warehouses. As we look ahead, we look into a different kind of phase, still focused on growth and our long-term growth ambitions, but also more focus on operational excellence and execution, and also from a financial point of view, we enter a highly cash generative phase, offering us a lot of freedom to keep investing no matter if the markets are friendly or less friendly out there. And digging into what we have covered for the last 2 years, I think, of note for us as a first-time buyer of a company outside of Denmark after 75 years of operation in just 1 market, we have been able to deliver sustained market share gains with growth in all 4 markets and both the physical channel and the online channel while integrating. We have seen, and this was not something we counted on. We have seen a growth in our membership across the Nordics, past the 6 million mark for the number of members, which is obviously a very, very key asset for us and a key part of the reason we are competitive. We also announced when we acquired KICKS that we would be able to deliver DKK 140 million in improvements and synergies. That's on track. It will be fully in, in this financial year. And as we said, with the financial year reporting, we have identified another DKK 50 million of synergies coming into the next financial year. We have a Nordic organization. We have a Nordic management team, leadership team in place, and the IT integration that is still running, it's on track, and we have actually delivered in the last quarter, our first win on a joint e-commerce platform where Finland migrated into the new Nordic platform. So IT integration on track as well. Two automated logistics centers. That is, of course, a good project, both financially but also operationally to completely remake our supply chain. It has been delivered on time, on budget and they are both now fully operational and entering the phase of the learning curve phase, getting more and more efficient month by month. And financially, a full refinancing completed on competitive terms, offering us more headroom if we were to meet that and the launch of a share buyback program with the financial year. The next phase, and I'm not going to make any predictions about whether it's going to be an easy market or a difficult market. It is, for sure, a volatile market. But we have a strategy to grow, driven by factors that are within our control. So our growth and our long-term ambitions to grow, they are driven by assortment expansion, offering more to our members and customers in all markets. They are driven by online growth, delivering faster to the customer, this wider assortment and becoming an even more attractive place to shop online and moderate store expansion, not a wild right of store expansion, but we see opportunities for moderate store expansion. And I could add to this list, the membership growth also as an important driver in uncertain times. As for the margin and the margin improvement that we are foreseeing, we have a lot of levers to drive the margin improvement. Operational excellence for sure, will be a headline for us going forward, the realization of the '27 -- sorry, '26/'27 synergies that we have announced. Our Nordic House Brands, which is an area we will start focusing more on taking national champions out into all 4 markets. And then our retail media offering, which is an area where we are very advanced and where we can offer to suppliers Nordic offering, something that they are really asking for and demanding of us that we can deliver as one of the few companies operating in this market. So we see significant tangible levers to drive margin improvements or create the margin headroom. We need to stay competitive on value in a time where consumers are looking for value. And then again, at a phase where we will deliver significant cash flow generation, which would give us a lot of freedom to either deleverage, invest in growth, and, of course, also distribute to shareholders. So a lot of financial freedom to operate no matter if the markets are friendly or less friendly out there. So all in all, a milestone a new chapter, a new phase with more focus on operational excellence than the 2 years we've just gone through. And therefore, we feel confident in maintaining our long-term financial ambitions. As for the quarter and the financial results of the quarter, 4.7% growth year-on-year currency neutral, reported growth, 6%. So we got a bit of help from the SEK improvement. On the other hand, on the margin, down from last year, driven mainly by FX by higher Swedish krona. And still, again, so we buy in Swedish krona, we sell in Norwegian kroner, and that has affected our margin. But underlying, we see a flat margin towards last year despite the fact that we have extra cost opening and running the Danish warehouse and the redundancy that we have as we have opened the Danish warehouse. So this is in line with our expectations, underlying what we had expected for the quarter. So we feel like this is a start to the year with no surprises. And I think in this market, no surprises is what you can be hoping for. The highlights, of course, online growth, 17% so still growing double digit. And as you look at the numbers, remember that Skincity is now completely out of the numbers. We did have significant revenues in Skincity same quarter of last year. That's gone. The business is closed down, and it's out of the numbers. So 17% growth, I think, is very good and definitely above the market growth. Matas Beauty growing and this is not surprising. That's where we can offer a lot of value to consumers. And one of the benefits of our strategy is that customers are able to trade down within the 4 walls of Matas and increasingly within the 4-wall online proposition of KICKS. As for gross margin and underlying improvements, we did see, as I mentioned, headwinds from currency effects on COGS being bought in SEK and sold in NOK. And of course, the Skincity closure, Skincity was a high gross margin business, but a loss-making one. And that affects, as you look at gross margin, that affects somewhat. I'll return to Matas Logistics Center, but the headline financially is, of course, that we are now entering a phase of normalized CapEx and significant cash flow generation. Our synergies are on track. We paid the dividend and the share buyback program. So as we look ahead, we see no reason to make any changes to our guidance, revenue growth of 3% to 4%. And if we exclude Skincity, that is before -- that is between 4% and 8%, so well in line with our long-term financial ambitions. And we maintain our EBITDA margin guidance as well of 15%, knowing that we see the double count of cost in the first quarter disappear as we go into the quarters, the learning curve from our new facilities continuing and synergies rolling into the business. CapEx also maintained between 3% to 4% of revenues, DKK 330 million, including the last little bit of investments into the Matas Logistics Center, so that's the guidance for the year maintained. As we look at the numbers again, Matas driving the majority of growth if you look at headline numbers, 6%, and that includes our subsidiary, Firtal and Grænn and Web Sundhed, but 6% growth in Matas and a gross profit margin that's actually up due to both the category mix, but also the realization of COGS synergies. So a strong performer, Matas, the most mature market where we have the strongest market position. But again, the fact that Matas is able from that very strong market position to continue to drive this level of growth and clearly win market share, I think, is just a testament to the strength of the concept and the strategy. For KICKS, 2.3% growth. And again, remember to take out Skincity, and we've had a discussion in previous quarters, is there like a migration effect and so on. Now it's pretty clear. Skincity is out of the numbers. So these are the pure underlying growth numbers with growth in all markets and all channels. Profit margin down in part due to FX but also because we are investing in value. KICKS does not have a reputation to be the -- have the best price perception, and we are doing something about that. We want KICKS to be positioned as a fair value player in the market, and we have the headroom to do that. So all in all, 4.7% reported, 6% growth, 14.5% EBITDA margin, taking out FX in line with last year and in line with our own expectations. As for the strategy, continued progress. We are making headway on all 3 pillars, main pillars of our strategy. And our strategy is about serving our members better, offering more to our members, whether it's third-party brands, more new products, more categories offer to consumers or investment into price and value, but also the expansion of our in-house branch, which I will talk about later, but in very important area that we haven't really started to harvest yet that we can take our national champions, and we can roll them out into all Nordic markets. Again, closer to you, driving e-commerce growth, you see that very clearly. And the growth in membership as well is a testament to that strategy kicking in and working. And for our stores, again, it is a modest program that we have. We love our stores. They are central to our business model. We don't believe that you should rush into store expansion, but we are confident that stores and modern stores in the right locations are part of our long-term future. And I would also mention that we have recruited a very senior new country manager to lead and drive growth in the Norwegian market, which we find to be an attractive market where we have opportunities. And then finally, as I mentioned before, the whole idea that as a Nordic company, we would be stronger, have better bargaining position, be able to take out costs, clearly showing in this quarter as well. Our strategy is to launch more brands, more categories, educate the consumers and members that they can use Matas, they can use KICKS for much more than they did in the old days with the store around the corner. So no matter if they shop in the store or if they go online, they have a lot bigger choice and they experienced much more, many more news coming in and many more categories and many more needs they can fulfill by shopping with Matas and KICKS. A couple of wins, KIKO Milano, a really cool brand used to be very -- only their own distribution have now gone into retail in the Nordics choosing us as our partner, which we're really proud about, really good start for that brand. We see, which is of central importance. KICKS, which is -- the KICKS business is very strong in makeup, very strong in fragrance. We would like to build the strength in skin care that we know from the Matas side and acquiring and getting partnerships with some of these really strong, well-known brands that consumers might know from the pharmacy sector is of key importance to the credibility of our skin care play. And also in Denmark, the fact that we can both get the very high-end brand into our environment, and also some of these really top-selling products in the health and well-being space is a testament to the fact that suppliers see us as a relevant channel for products that they may not have considered to retail with us in the past. So good progress on this count. Closer to you, as I mentioned, more members, customer satisfaction critically going up, [ younger the ] graphics coming into our business. This is not an aging business. We see the young really shopping with KICKS and Matas, and they are shopping across more categories and channels. The key 1 for us actually is the fact that we have been able to make 2 supply chain transformations, a really big 1 in KICKS that is running very simply, numbers improving month by month, that has enabled us now to offer a wider assortment and faster shipping to consumers, but also, of course, run the logistics part much more effectively. It is in operation. It is in full operation. We have seen no major disruptions. So we are really proud that that's stable. The big thing is our Matas Logistics Center, our biggest investment in e-commerce logistics for Matas. We opened in the spring. It was a very smooth transition. I don't think customers noticed that all. And if they did, it was maybe for a week or 2. And of course, we go into the learning curve phase of this. So just 1 little fact. More than 1 million, we passed sort of the 1 million mark web orders shipped from this brand new facility with limited downtime. And that is I can tell you from previous experience and exceptionally well-run transitioned by our logistics team. So now it's all about operations. It's about getting all the benefits out, the learning curve, keeping the steady operations, seeing customers appreciate faster delivery, both in our KICKS markets and our Matas markets and for us, of course, seeing the cost to serve, improving as we progress into the year. A lot of discussion among ourselves and in the market about macroeconomic uncertainty, volatility and dropping consumer confidence, we're all following those numbers closely. That sentiment is reflected in our guidance for the year. And we remarked with the full year that in Denmark, we see no impact. That's still the case. In Norway, we saw a limited impact. That is still the case. In Finland, we saw no impact. That is still the case. And in Sweden probably more volatile of the markets. We did see signs of slope down both in market data, but also in peer reporting. And we wonder whether this is of a more cyclical temporary nature. Nothing has changed on that perspective either. So pretty similar to the situation we saw before summer when we reported the full year numbers. And with that, I'll hand over to Per to cover the financial results.

Thank you, Gregers. Well, and as Gregers said, this is really a quarter delivering as we expected and in line with our guidance for the full year. Let me take you through the numbers. Firstly, in terms of our revenues by banner, as Gregers alluded to earlier, Matas growing 5.3% with our subsidiaries, growing 12%, so really strong growth on our small business as well and KICKS excluding Skincity growing 7.8%. So coming out of the first quarter, with a 6% reported and 4.7% currency neutral. If we look at the channels, again, [ stores ], 1.9%. Of course, this is on a also growth on a like-for-like basis. We need to remember that we had fewer sales days in this quarter due to the timing of Easter actually impacting a little bit the store performance, especially on the Matas side. From an online perspective, 17%, excluding Skincity, again, a very strong growth as we progressed into the next quarter. Moving into our gross margin. And that is really, as Gregers has alluded to, this is where we have a little bit of special effect this quarter compared to our previously reporting -- Matas is straightforward, a strong growth also on the gross margin level, led by our product mix. As Gregers said, some of the synergies that we expected but also a stronger profitability or gross margin on our assortment expansion is really coming through. The maturity is actually showing in the numbers as we talked about since we launched all the assortment in 2021. On KICKS on the other side, we are investing in the market. As we've said all along, we are investing in price. We're investing in being more competitive, our Nice Price program is showing. And then, of course, we are citing some stronger gross margins from Skincity. But on the numbers, not as dramatic as it actually shows as 1.4% of the drop is coming from higher input costs and cost of goods in Norway and Finland from the Swedish -- slightly stronger Swedish krona. So that is, as also reported, it's 1.4% or around [ DKK 8 million that ] we are impacted with -- on that account. So in totality, when we look at it, we're growing our gross margin almost in line with our top line of 4.4% despite the impact from the FX. Moving to our cost. So basically, staff costs and other costs, if we start with staff cost, basically, we're looking at our staff costs, basically following the percentage compared to revenues compared to last year, slightly below actually. And that has also to do with the focus and the operational excellence space that we are moving into where we really focus on streamlining our approaches in terms of how we manage our salaries and also on some of the adjustments and the synergies we're getting on the organization. And at the same time, of course, as we move forward, building all the capabilities we need to win the Nordics. Other cost, of course, is impacted by the fact that we have very strong growth. When we grow our e-com business, as we go this quarter, it has an impact in terms of our shipping cost, and that is also reflected on external costs. Marketing is basically in line with our top line growth. And again, assortment expansion now is more and more in line with the growth that we are seeing as we are on a more mature level, especially on the Matas side. And the Nordic efficiencies and synergies that we talked about is coming in as we progress during the year. Taking that down just to summarize on our EBITDA adjusting for the FX, which is important. We're basically in line with last year, so a 0.4% impact on our EBITDA margin in this quarter. So actually 14.9% compared to 14.9% last year. And on that amount, we need to remember that in this quarter, we are running the learning curve where we just launched the MLC. So we have a little bit of extra cost. So we're very pleased with the performance also on EBITDA margin level. With the EBITDA coming in, turning into our inventories and then our cash flow, as you'll see, our inventories are up compared to last year. It is not increasing compared to end of last financial year, so compared to end of March is pretty much in line with that, adjusting a little bit for the FX. So the change we're seeing is actually the changes we made last year. As you recall, last year, we went live with KICKS Logistics, and we upped the inventories in the first quarter of last year to make sure that we have sufficient inventories both in stores and also in our logistics center to make sure that we've got that as efficient up and running as possible and would at least the impact on our on our consumers. In this quarter, we have now had the impact of Matas MLC. And of course, that impacts our numbers compared to last year, we were running with slightly higher inventories. And as we progress throughout the year, we expect that to level out somewhat. Turning to the cash flow and really a strong quarter. And some of that or a majority of that is actually coming from our improved working capital, and that is linked to a reset of our accounts payables to a large extent. And that's the majority of the impact. And that's coming from a very low accounts payable or support on our inventories for our suppliers. You can say, end of last financial year, we have reset that to a more normal level in this quarter, and we expect that to continue throughout the year. The other point, of course, to our strong cash flow is that we are now back into a normal level of investments. Last year, we had the investments in MLC. And this year, we are back to the normal 3% to 4%, which is also improving our cash flow with roughly DKK 100 million. So a positive of above DKK 300 million in this year's first quarter compared to last year's first quarter. This is not a timing. It is more a reset and the investment level will continue at the same pace, which will be lower than last year. Which brings me to the gearing, and that means that we're going to close this quarter around 3x, 3x our EBITDA, and of course, this is impacted by the stronger cash flow. So a slight decline in this quarter. Normally, in Q1, we go up a little bit, but in this quarter with our stronger cash flow, we actually decreasing the ratio and that then ends up with our guidance. As Gregers has already alluded to, with the performance in first quarter, we remain and keep our guidance for the full year, both in terms of revenues, our EBITDA and EBITDA margin as well as our investments in the 3% to 4% range. And with that, I think Q&A before we say thank you. So I'll leave the table over for questions.

Thank you. We will now start the Q&A session. [Operator Instructions] The first question will be from the line of Poul Jessen from Danske Bank.

Yes. Thank you and congratulations to the report. No surprises like the last time. Question number one, you reiterated the view that you had on the 4 Nordic markets, but we also see the split between high end and Matas Beauty performing quite different. Can you put some words on why? Is it the market that is taking down the high end and up on the [indiscernible] people are trading down? Or is it confidence with launch of new brands or that you are putting more pressure on Sweden and Norway on the [indiscernible]. So what's the reasons here?

Yes. So I think you almost gave the answer, Poul. It is a combination of when consumers are uncertain, they do a bit of trading down, but it is also in part driven by our focus because what we do typically when we feel that there is a softer consumer, we do shift our marketing around both the [ messaging ], but also the types of products that we are [ sizing ]. So you could say it's a bit of a self-reinforcing thing. I would say the number that I would look at more than anything is the number of transactions. So we're 300,000 more transactions in the first quarter compared to same quarter last year. And to me, that is the best sign of underlying health of the consumer that you can ever find as a retailer, those kinds of numbers. So we are not becoming irrelevant, but we are seeing shifts in the market. And of course, with KICKS being more high-end positioned, they are a bit more exposed. But also remember that Skincity was almost entirely a high-end proposition. So that should also be taken into account.

So if you see people trading somewhat down, then we should expect that split between the 2 categories continuing at least in the near term?

I think that's hard to predict. We go into the golden quarter. And just -- I mean, we're already there, mentally thinking about Christmas. Christmas is a gifting season. It is a season where people are more ready to spend and splash on their own. So I don't think we can take Q1 performance and then extrapolate into the rest of the year. And we are in a position where we are in tune with the customer at all times. So we see this little shifts in our customer data, and we adapt our marketing and our messaging and our campaign. And we can do that because we're so digital now in the way we market. We can do that with very, very short notice. And as you remember, Poul, in the old days, it was like a 20-month or 20-week plus lead time to begin to change messaging when we were driven by leaflet communication, mass marketing and communication. Now it's one to one. It's digital, it's day by day. It can be -- even be influenced by is it raining or is the sun shining. So I would not jump to conclusions as for the rest of the year mix.

Okay. And then on Norway, your changing manager out there. What's the reason behind? Is Norway underperforming? Or is it because that you are changing the focus on what's going on that you want to expand faster or what's behind?

We've actually had a good and strong team and Norway have been performing, looking at local currency, so take away the currency effects. I think Norway has been performing very convincingly over the last few years. I think it's fair to say that in the old KICKS structure, there was a lot of focus on Sweden and less on Finland and Norway, and we just want to add more attention to the opportunities that we see ahead of us in both Norway, which is a very attractive market from a financial point of view, but also Finland with a smaller market today, but we are not as penetrated in Finland. So what you should take from this is it's not a reaction to something gone wrong or not performing as planned. It is really an investment in being more clear and having broader ambitions in the Norwegian market. And that, of course, was in our long-term guidance. That was always the plan that we would see some potential in those 2 markets. So this is just execution of a strategy that we think should be driven by even more senior leadership added to an already great Norwegian team.

And then a more technical question. Skincity [indiscernible] . You say they are out of the books now. When are they pulling out of the base when we do the year-over-year comparison?

Two first quarters of this year is the majority. And as you remember, it's around DKK 80 million that -- of sales in Danish in Skincity overall, the vast majority of that in the 2 first quarters, there's a little bit left in the Christmas quarter and the fourth quarter, but it should be insignificant from the conversations we're having about headline numbers.

Okay. But does that mean that when we look into the second quarter, then it's below DKK 20 million headwind?

Second quarter, I won't comment specifically on second quarter. But as you look into Q3 and Q4, Skincity should not be a part of our conversation.

The next question will be from Yiwei from SEB.

It's Yiwei from SEB. I have 2. Firstly, could you please elaborate a bit on the price initiatives in the KICKS? Is it sort of a normal sales campaigns? Or is something special here? And also if you can say that if we should expect this sort of same kind of margin dilution also in the coming quarters?

Yes. So remember, before we go into the commercial mechanics, just remember the 2 things that are structurally different or different 1 is the FX that the KICKS margin was pressured by the fact we buy in Swedish and sell in NOK. So that's actually a material effect, but also the fact that Skincity leads the numbers and Skincity is a -- or was a higher gross margin business. Commercially, how we think about it is working with our suppliers to fund competitiveness as a Nordic group go to suppliers and develop growth plans, win-win initiatives with suppliers that helps us fund the price investments that we're making. Having said that, we also, from time to time, make decisions to fund price cuts on our own margin just if we see that we're out of line with competitors or if we see a good business case and shifting from more campaign-driven sales to more of an everyday low price offering. And these are things we play with all the time. And then, of course, on top of that, there is the normal campaign cycle that we might adjust up and down. So clearing out sort of the more one-off elements of FX and Skincity, this would be reflecting where we are. You can't really say that this is the level going forward because we do see opportunities also to fuel our own brand offering, which is margin expansive. And of course, we're having a conversation with suppliers all the time how to share the bill for being price competitive in the market.

And my second question here on the -- your EBITDA margin guidance, 15% for this year. Is it a currency-neutral target? Or is it sort of already reflecting the currency movements?

You can say the EBITDA margin target for this year of 15%, we keep that, and we maintain our guidance for that. In the first quarter, we got a, indeed, not a currency-neutral adjustment, but we got an FX impact of 0.4%. As we move forward in the year, we'll see how that develops and some of the mitigating actions we can do to mitigate that. But still looking at the full year, we maintain our guidance around the 15 percentage.

Yes. And if we assume the similar movements of Swedish kroner against the other 2 currency where you do the procurement, yes, the 15%, we have to sort of put a negative FX impact on this. Is it a fair assumption?