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

Welcome to the Matas Annual Report for the financial year 2022/'23. [Operator Instructions]. This call is being recorded. I'll now hand it over to the speakers. Please begin.

Thank you, operator, and welcome, everyone, to the call covering our financial year. I'm joined by Per Johannesen Madsen, our CFO; and I'm Gregers Wedell-Wedellsborg, the CEO of Matas. We're covering a year that has been remarkably stable and full of progress despite a lot of volatility in our environment. I'll give my comments to the financial year and the strategy. I'll hand over to Per to cover the financial results. And then I will return to remark on the guidance for this financial year, and then we'll take questions. As for the year, revenue growth of 3.3% and looking back to the last normal year, if you will, after a year of -- years and years of lots and changes, we're seeing a Matas that has been able to grow by around 6% compared to the year 2018, '19, the last normal year, if you will. So the story about this year is that we have managed to grow on top of a couple of spectacular years during COVID, where we grew outsized. We have been -- we managed to sustain that growth and actually build on that growth despite the consumer confidence crisis that we have seen in this past year. And as we look at the quarters, we had a strong finish to the year in terms of sales, more than 8% growth coming from both the stores and online in the last quarter of the financial year. The main numbers, we see revenues coming in at almost DKK 4.5 billion revenues, EBITDA before special items of DKK 809 million and EBITDA margin of 18% and a free cash flow of DKK 423 million. I think what is notable from this chart is that the growth is driven by an increase in the number of transactions. And we consider that to be really healthy growth. It is happy customers shopping more frequently with Matas. So as for the strategy, we consider this past year, evidence proof that the strategy that we're pursuing, a strategy of assortment expansion online, is actually starting to show results. And it is that strategy that is allowing us to grow despite macro uncertainty and volatility and despite being up against a very good couple of years for the last 2 financial years. So I'll dig deeper into a couple of the highlights on the strategy and give you some flavor on that part. First and foremost, our growth recipe is having both a strong store network and a very strong online offering. And expanding the offering online, we have added more than 8,000 new products in the last year, more than 180 new brands in the last year. And that has allowed us to sell products that we have never sold before in Matas that the customer don't usually shop in Matas more than 100 million. And that number in itself is maybe not significant, but it is proof in our opinion that our members, they do actually want to shop new stuff with us, stuff that they haven't normally shopped with Matas. And this goes across categories, we see it especially within health that more and more customers buy into our health offering. Looking at our business model and our club also, what we're seeing again and again and have seen for the last few years is once a customer starts shopping both online and offline, her annual spend with Matas grows quite significantly. So omnichannel customers, they have an annual spend that is more than double of customers that shop in only 1 channel. And at the same time, we're seeing growth in the number of members and customers who are shopping in both channels. And this is our recipe. This is our business model. This is what allows us to grow faster than the market and also be more profitable than the market because we can offer services to the consumer that no one can actually really match. One of the components of that is what we call connected retail. Connected retail is the ability of our store colleagues to offer the entire range, the entire online range to customer shopping in the physical store. So more than 200,000 orders that were made on matas.dk they were actually fulfilled and picked in store, if you will, with no shipping from the central warehouse to the store. And of course, that is from an economic point of view, really attractive. It is also very, very fast from the consumer point of view. We also see the mobile POS or the mobile cashier, allowing customers to pay on the shop floor rather than standing in line to go to the cash register. 16% of transactions are actually fulfilled via mobile POS, giving the customers a better experience and obviously allowing us to save costs in operations. And then -- and this is a pure coincidence that the number is the same as in the assortment expansion, but more than DKK 100 million of revenues generated in the store from products that are not on the shelf in the physical store. So 12% growth in that and an area that we'll continue to shine a light on. The big news for us for today and news that has been long in the waiting, if you will, is that we have signed an agreement to construct a 32,500 square meter logistics center to open in the spring of '25. This is a decision we made long ago that we have made adjustments to. We hit the market right when it was overheated, the construction market, and we have -- we now evaluate that this is the time for us to build what is going to be the biggest Matas store, if you will, allowing us to further expand our range, allowing us to ship to the entire country and allowing us to fulfill day-to-day, which is part of our promise to the consumer. And of course, it also gives us cost savings and efficiency gains and they are actually more attractive now with the wage inflation picture that we have seen over the year. Finally, this is an area or this is a facility that will be powered in part by solar panels as well. So it is not fully self-sustained in terms of energy. But when the sun shines, it will be fully run on solar energy. Our international business is still in very early days. We set out in the last financial year to be in 25 -- sorry, 75 stores in Germany to test the interest of the German retailers and consumers. We exited the year with 225 retail partners selling Matas products in German stores. And we see the reaction of the customers and the feedback from the retailer being positive. So we consider that test to be validated, even though the numbers are not great. This is a great way to have exposure and get leverage on our private label brands. Also, we started just a few months ago, selling in Sweden and Norway. We have not backed that launch with any kind of significant marketing. What we're seeing is members coming in, in both countries. And we're seeing quite notably very high customer satisfaction. And this is really our key objective to make sure that our offering that what we deliver to the customer actually works for the customer. The worst thing you can do is add a lot of marketing spend on to something that doesn't deliver happy customers. And also of interest, some of our top-selling brands in those markets are our own label brands. So it's not just competing to sell third-party brands. It's our own brands that are performing well in those 2 countries. With that, I conclude my remarks on the strategy and overall for the year, and I will hand over to Per to cover the financial results.

Thank you, Gregers. And let me take you through the full year performance of Matas this year. Looking at our revenues, we're looking at a growth, as already mentioned, of 3.3%. And looking at the gross margin development, you see here on the graph, a minor decline in the gross margin. Actually, if we adjust in last year and as you might remember, there was a special VAT case last year, which gave us an income of DKK 20 million. Adjusting for that, we actually see a slight increase in our margin going from 44.8% to 44.9%, and that is actually in a year, as Gregers has already mentioned, with a lot of volatility in the market. Looking at our cost side, yes, we have an increase in our cost base. And that actually reflects, as already mentioned earlier that we have been investing in our international expansion, both Germany, but also, as you saw recently in Norway and Sweden, which has added some extra cost. And that like everybody else, we've also been impacted, of course, by the increase in energy costs. So that all translates into a EBITDA growing from last year, although with a margin slightly below, which is linked to the investment in, as I just mentioned in our international expansion. From a free cash flow perspective, we're generating above DKK 400 million free cash flow this year. And if we compare to last year, the big moving part is really around our working capital and taxes interest where we last year had a lot of payments coming out of the COVID. So all the deferred payments on taxes, holiday allowances, et cetera, et cetera, was paid last year, which we, of course, didn't see this year. In addition to that, we have this year actually invested, as already mentioned in the land, so we were ready to build the new logistics center. Acquisition last year, as you remember, was the acquisition of Web Sundhed, which, of course, we didn't do again this year. Overall, very healthy cash flow of above DKK 400 million for the year. Part of that is actually also driven by the fact that we're managing our inventories very tight. As you can see, we're closing the year with an inventory at 20.3% compared to the last 12 months revenues, a decline. And as you will see, quarter-by-quarter, we've been able to really keep a focus on our inventories and keeping them as in a moving trend in a very positive way. On the right side, you will see that we have been able to do that with really focusing on our existing business, optimizing that and then allowing for the assortment expansion, all the growth areas actually to increase our inventories to be able to fulfill all the new assortment that we're delivering to our customers. And I'll hand over to Gregers.

Yes, and I will cover the guidance for this financial year. We guide for 3% to 6% revenue growth for the financial year. We have a guidance of around 8 -- 17% for the EBITDA margin before special items, and that includes the OpEx investments, if you will, in driving our growth strategy and driving our assortment expansion strategy. We'll have CapEx, rather large CapEx for next year. And of course, that is mainly due to the fact that we take the first part of the investment in our logistics center, DKK 250 million is the first part of that ticket invested in the logistics center. We will continue to invest in IT software development and also in refurbishing our stores as well. So that is our guidance for the financial year. We have listed the assumptions. And of course, one big question for us and for all of us is what is the overall market going to look like. And what I just want to highlight is that our growth strategy and our long-term growth strategy does not necessarily rest on whether the market grows outsized. It really is up to us to execute on the assortment expansion strategy. So we consider that to be a quite robust growth strategy even in a market that might turn out once again to be volatile. So with that, we conclude the presentation part of the call. And operator, we're ready to take questions.

[Operator Instructions] The first question will be from the line of Sebastian Grave from Nordea.

I have a couple, I'll take them one by one. So first, Greg, it sounds like you said that you have been -- if I'm not mistaken, you've been introducing 8,000 new products over the last year. So to me, it sounds like you have quite a number, you have to up this number quite a lot over the coming years to meet the CMD assortment expansion target of 100,000. So what is the assortment expansion journey from here? And is it still a prerequisite for you to introduce 100,000 new products to meet the '25, '26 targets?

Yes. And thank you for that question. And it allows me to be quite specific. We don't have a target in and of itself to have 150,000 SKUs. We can with the facility that we have in Humlebæk, we can actually get to that size if we want. But for us, this is really about finding the assortment, the new assortment that works for our customers that rotate sufficiently fast for us to be a good business. So if we can deliver on our growth ambitions without reaching 150,000, that's fine and dandy for us. Long term, we believe that assortment expansion is a journey that has just begun. But what we have learned over the last year is really one thing is introducing the assortment, another thing is to make sure that it is well known that the awareness is being built amongst consumers that consumers actually get a preference for buying the new assortment with us. So in a sense, what I'm saying is we can actually reach that number without necessarily going to 150,000. If we need to go to 150,000, we can do that.

Okay. Very clear. In your EBITDA margin guidance, you stated that the assortment expansion and international growth will weigh around 1 percentage point year-on-year. And I mean, I guess, given that you are in both an early phase in the assortment expansion and the international growth strategy, that this is going to be a drag on profitability for the years ahead. So could you maybe give us some more color on the sort of the margin journey from here?

I can give you next year and we can give you that our long-term guidance of reaching between 17% and 18%. That's still what we believe in. And what we see in the year '25, '26, we're beginning to get the benefits from our new logistics center. And we're seeing new categories mature. And to give you a flavor, what happens if you introduce a new category, you have to back it with more marketing because people are not used to buying this and finding this as Matas. And you probably don't have the -- quite the same terms with suppliers because we're a new retailer of some categories. So in the initial phase, it will be gross margin, even EBITDA margin dilutive. But as Per just mentioned, if you look at the last year, we've actually managed to keep our gross margin flat in real terms. And that is, I think, an indication that we have a lot of levers to pull, and we're pulling all those levers, both in terms of our own brand assortment, which we have really strengthened over the last few years. And that, of course, is very positive for our gross margin, but also finding out what is the right way to introduce new categories to the market? Do we need to do big TV campaigns, is it better to do e-mail, how can we use the stores to really build awareness around those categories.

Okay. So -- but I mean, given that the logistics center will be up and running '25 spring -- spring '25. I guess, what you're saying is fair to assume that the margin guidance will be back-end loaded?

I think -- well, you can make the assumption. We're quite firm on our long-term guidance. We're, of course, firm on our guidance for this year. And there is a lot of discretion on the guidance in the year between what -- how much do we want to push, how much do we need to push, how much traction do we have on -- or momentum effect that we have from categories that we have already launched over the last few years. So I think it's too soon to make any real interpolations.

The next question will be from the line of Mads Quistgaard from Carnegie.

I will take my questions one by one. First, go to depreciation, amortization and net financials and also your tax rate for the coming year. Can you put some comments on that?

Yes. Thank you for the question, Mads. On depreciation, it is really a impact of the investments we made over the last couple of years and also this year, where we do incremental investments, as Greg had already talked about in the whole omnichannel setup. So in our web e-commerce business, we do it on our app, we do on our connected retails and also the way we invest in our stores. That whole thing with the rules around depreciation, where we're a little bit more aggressive on some of the investments on the IT elements actually drives an increase in our depreciation in the last quarter of roughly DKK 16 million, DKK 17 million, and that is what is reflected in the full year numbers also when you compared to last year. In terms of the tax rate, roughly the same. What you'll see in fourth quarter this year is actually the adjustment for the full year. So when we do the final tax update for the year, there is minor movements and thereby, we do the final sort of tax assessment for the year, and that's what reflected in the fourth quarter, which makes fourth quarter look a little bit more tax heavy than it actually is. But overall, the tax rate will, going forward, roughly be in the same range as we close this year.

What about net financials?

Net financials, as you see, you've seen an increase. That's just a reflection of the interest increase we've seen in the year. Looking forward, we're looking into determining a hedging or a policy around that or actually, we have a policy, but when we actually initiate the hedging going forward. Right now, we're looking into, hopefully, a decrease in interest rates and we'll benefit from that, of course, as we move forward.

Very clear. Then I have a question on the CapEx. So I remember in the Capital Markets Day, you did this CapEx number between DKK 1 billion to DKK 1.3 billion going towards 2026. I guess, first of all, the timing, maybe it's including 2027 now. Are you still expecting to use DKK 1 billion to DKK 1.3 billion in CapEx over the coming years?

Yes. We will end up in the high end of that range with the decision to build the Matas Logistics Center and build the size that we have chosen to build in long 5-year period, around DKK 1.3 billion.

Yes. So it's including 2027 now, right? The period....

No, it's just -- the guidance is until including '25, '26 going back 5 years. Yes.

Okay. Good. And then my final question is on Sweden and Norway. So a pretty good start, but obviously also a slow start. When do you expect to do this marketing push in these countries to get a stronger foothold in the market?

I think that's something that you'll know once we decide rather than give advanced warning. And frankly, Mads, it's been all about does our setup allow for a good customer experience, is there a good response, what kind of brands are they buying, what kind of difference can we make in those 2 markets. So it's all about learning how to operate in those 2 markets before we make any decision.

And just to follow up. Are you satisfied with the sort of the feedbacks that you're receiving right now?

Yes. I think the one number that we're really looking at is customer satisfaction. And with customer satisfaction using the NPS, Net Promoter Score methodology in the mid-70s, that's really good. That's the kind of customer satisfaction you usually only get if you've been in the market for a long time. So I think that's a very encouraging response.

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

Yes. I have a few questions as well. Coming back to the logistics center, as you say DKK 525 million to DKK 550 million. Can you remind how much did you spend last year?