Earnings Call: Q1 2022

Aug 18, 2021

Ladies and gentlemen, welcome to the METAS Q1 Capital Markets Day Call. For the first part of this call, all participants will be in a listen only mode and afterwards, there will be a question and answer session. Today, I'm pleased to present CEO, Gregor Swilsbach and CFO, Anders Grohl Scharnsten. Please begin your meeting. Thank you so much, operator, and welcome everyone to the call covering our Q1, going straight into our Capital Markets Day at 10:30. For the quarter, it is a beaming quarter. We have grown across the board. We are upgrading our guidance. And today, we will be launching a new 5 year growth oriented strategy. So a big day for Matrix today. We will start out with my comments. Then I will hand over to Anders to go through the financial results. I will comment briefly on the guidance for the financial year, and then we will move to questions and questions only about the quarter because we will have ample time to discuss the new strategy afterwards. So this has really been a beaming quarter, and it is, of course, a reflection of the euphoria and the happiness out there because Denmark has been reopening. People have been resuming with their close to ordinary lives, but still an exceptional quarter. We saw revenue growth of 7.9%. We saw growth across all categories and across both the stores and our online business. And in particular, the recovery of our stores towards the end of the quarter is really heartwarming and warming on the business side as well. Like for like growth was 5.9%. And if you compare to our pre COVID days, it's a whopping 16.6% like for like growth on the business. So EBITDA before special items increased with the same or just about the same rate as revenue to by 7.5%. And that leads us to upgrade our guidance for the year due to a better than expected Q1. And we now enter a period of the year where we saw very high growth rates last year, and we do expect a gradual normalization of consumer spending the rest of the year. And then, of course, as I mentioned, we will be talking about the new 5 year growth strategy extensively later. And with that, a brief introduction. Anders, I'll pass over to you. Thank you, Gregas. Well, as you see here, the key financials were pretty good, as Gregas already mentioned. Like for like growth of almost 6% and total revenue growth of almost 9%. Our gross margin, which was rock stable at 44.4% compared to the same quarter last year. Costs were up by CHF 20,000,000, but as I'll come back to as a percentage of sales, they were pretty stable. EBITDA grew, as we said, by 7.5%. And that does the net profit actually by more. The only sort of thing that looks a bit strange when you look at the numbers straightforward is the free cash flow, which dropped considerably. And I will come back to why that was the case. Two numbers that we look on as key long term KPIs for us is basically the number of transactions, which reflects sort of the traffic to Macy's generally and, of course, the basket size. And we're pleased to see that we had a nice bump in the number of transactions by 5% and also a rising basket size, although somewhat more modestly at 1.2%. On the next page, we're looking at slightly more long term trends, and I'm not going to bore you a lot. I think these are very good numbers. They speak for themselves. I think, 1st of all, it's very nice to see now that we have definitely moved away from that trend of being growing around 0s and now growing substantially. And another thing that I'd like to point out is that I think we've been talking for a number of quarters about the gross margin and the fact that we think it's stabilizing. And I think when you look at these numbers, it really bears out the fact that we are seeing much more of a stabilization in our gross margin. And with regards to EBITDA margins, pretty much the same picture. Now just to dive a slight bit more into the cost. As I said, stable cost ratio, 26.2 percent last the same quarter last year, 26.1%. So that's basically the same number. But yes, cost did go up by 20%. And when we then look at that and see what actually happened in the cost picture, well, there were a number of cost drivers. We added a new activity to the business in Web Sunhill, and that did add about CHF 3,000,000 of cost, which obviously weren't there the same quarter of last year. And then as online keeps growing, there is a variable cost increase, which is basically linked to the turnover, and that added about $10,000,000 There were and there was an increase in the personnel cost at the headquarters. But that was two factors, roughly fifty-fifty. One of them was the fact that we actually put a little more aside for the expected year end bonuses this year than we did the same quarter last year, obviously related to the fact that we're also raising our guidance and things are going quite well. And then there were some costs that we've been adding in order to be able to execute on some of the longer term cost reduction products that we are working with, in particular, the Maesta's ways of working Wow project that isn't really gearing up. Finally, there was an increase in personnel cost after physical storms. As you know, we very, very I mean, this is the largest single cost issue for a cost element for Mesa. So we really look at this with a very, very, very tight with a tight rein. And the fact is that we control it basically by looking at the wage percentages, I. E, how are the wages developing relative to turnover. And as turnover was a positive development in the Q1, the fact that there was a slight increase in personnel cost is not anything that worries us. Actually, the cost ratio went down. Lastly, it's positive, I think, still to see that we are continuously trimming our underlying cost base. We're not it's not like it's a huge number here, but the fact that we're still trimming the underlying cost base this quarter was about $3,000,000 is a positive sign. Inventories. As you all know, inventories has been historically a bit of a challenge for us. But if we look at what happened now, I think it's interesting to see on the right hand side of this, you can see, well, there were numbers. There were areas where we are growing, and that's particularly online, where we did add new inventory. And that has to do with the sharp growth that we are seeing in the online business. And so it's basically tied up to our facility in Home Depot. If you look at the rest of the business, we were actually able to further take out, again compared to the same quarter last year, about EUR 40,000,000 of inventory. So overall, inventory levels were lower by EUR 24,000,000 Now you should notice one thing because this explains some of the cash flow development. If you look at the relative swing in the inventories between the Q1 of last year and the Q1 of this year, you will notice that last year, the swing was a small increase of about 15,000,000 dollars in inventories, while this year, there was an increase of around $90,000,000 That has to be tied back to the fact, if you look at the percentage, the small white numbers looking at the percentage of the inventory levels compared to the last 12 months sales, we were really down at 20.8% at the end of the last quarter. Now we are at what we still think is a very comfortable 22.5%. This, of course, has to do with the fact that there's always a trade off between making sure that you don't run into too many stock up situations and trimming your inventories. But it has meant that in season isolation in this quarter, we've been adding quite a lot to the inventory. Coming back to the cash flow. How do we explain what happened in the cash flow? Well, the important bit here is that if you look at the operations before changes to working capital, there really isn't much to say. I mean they were $10,000,000 lower than they were last year. That's a combination of actually higher direct income after tax, but then also slightly higher depreciation. And then on the other hand, we had a cash settlement of 1 of our of the long term incentive programs, which attracted from this cash flow. The big change, of course, is changes to the working capital. And there, we have to see there are really 2 big major explanations. First of all, as I just mentioned, inventories grew. They always grew in the Q1, but they grew by a lot more this year than they did last year. It's about €70,000,000 And secondly, as we are all aware, some of those special measures that have been taken in connection with COVID-nineteen, which gave us some postponement in the payment of VAT, of payroll taxes and other things. Well, they added a lot to the cash flow in the Q1 of last year, and they didn't add anything this year. So there was a negative swing relative to last year. So that's really why you're seeing this big, big swing. It explains more than twothree of the overall swing. The rest are lesser and not so important points. Just to put it in perspective, as you go back and look at 20 nineteen-twenty 20, changes in working capital for the Q1 was around the same level. So it's we don't think this is not something that keeps us overnight. This was just a normalization. For the rest of the cash flow picture, nothing really surprising, slightly higher CapEx as we are investing heavily into our IT. And then, of course, there was the fact that we acquired the activities in Web Stonehill this year, which means that acquisitions and other investments are up compared to the same quarter of last year. So with that, keep it short and sweet because these are good numbers. I'll hand you back to Gregersen, and he'll talk a bit about the guidance. Thank you, Anders. And as for the guidance, we raised the guidance on the top line from minus 2% to plus 2% to minus 2% to minus 2% to plus 3% growth compared to last year. And we also raised the bottom line or the lower part of the guidance for the EBITDA from 17.0% to 17.5%. Now what's going on? As I mentioned, we are now entering a period where last year we saw double digit growth on the year before. Really, the COVID boost came in with the full force, and that's what we're up against as we look into the rest of the year. We do expect that we know that we're not going to sell a lot of protective equipment, and that's the one thing we're happy about, not selling anymore face masks and hand sanitizer to a large degree. And we do expect that over the year, we will see more and more of a normalization of consumer spending as people start traveling more, as we are up against October, in particular, last year, where we had a huge stimulus package of holiday pay from the government. And we also expect that online competition will increase in the coming time. Now that is a downward trend. What we expect is that a lot of the initiatives that we have been working on for the last year, they will start to punch in. Of course, the acquisition of Web Sunhill will add to our growth, and we will execute the first of our range extensions already very soon actually, but progressively over the remaining quarters, and that will offset some of the reversal effects. And as we mentioned in the full year guidance, we maintain this perspective of having firepower both to meet competition, but also to kick start our new growth strategy and invest in future growth, and that is primarily marketing investments related to the new assortment. I should also mention that our CapEx range is now raised from previously €155,000,000 to now a range of €295,000,000 to €315,000,000 And that is just a reflection or not just, but that is a full reflection of the fact that we are now moving into the realization phase of our big logistics projects, the one that I will return to in great detail later. And in that guidance, M and A is not included. And with that, we will conclude our review of the Q1 and we will open for questions for Q1 only. Thank We have a question from the line of Matt Kvistov from Carnegie Investment Bank. Please go ahead. Thank you and congrats on the amazing results this quarter. Just one question on the quarter. In the last few quarters, you have given some providers some indications about the current trading going into the first half of the current quarter. Why are you no longer giving these data? And I guess you have at least seen a slow momentum based on the guidance upgrade you provided today. So can you first explain the current momentum in the quarter? Thank you. Yes. So this is really a return to our old ways and maybe that's a reflection of where society is going in many ways, that we think that giving guidance in the middle of a quarter will open up a lot of questions because there are always these seasonal changes, and we might have a big campaign at the end of 1 quarter, 1 year and the start of a quarter another year or month the other year. So really, we think it distorts more than it adds. So just softly, I can say that it's been a sunny summer. It's been a summer with more travel activity than last year, but still a lot less than a usual summer. So that's, I think, the only remarks that we're going to give for the quarter that we're in right now. That's great. Thank you. And we have another question from the line of Magnus Jensen from SEB. Please go ahead. Thank you very much for taking my question. I just have 2. First, department stores sort of has obviously opened again. And but still, you performed pretty well on high end duty. Could you talk a little bit about the dynamics here? And then what kind of impact it has had on your business as the department stores have reopened? Yes. So as you look at the Compared to Q1 last year, of course. As you compare with Q1 of last year, remember that Q1 of last year was composed of sorry, Q1 of last year was obviously an era where shops really closed down and you saw the online explosion, you saw a massive change in customer behavior, what people were buying. This year, we are we have in the 1st part of the quarter, we still had restrictions on other parts of retail, including department stores. However, the great thing, the great trend driving the quarter is just the euphoria of going back to life. And I think all of retail has benefited from that. Surely, we can tell from the numbers across the board. And in particular, I would say that the comeback of the stores is what you should take note of. And we saw that increase as our competitors and colleagues opened up, we actually saw our stores performing more and more strongly. And this goes to a point that we talked about many times last year that it's no good for Metas if the rest of the retail is closed. It's not like it's a wonderful monopoly. It just means that people are not on the streets, and we're losing a lot of these high street traffic impulse buying situations. So a good quarter to see the stores come back even if competition heated up. High end beauty, as you remarked, I think that's a reflection of the fact that people have a lot of money. They have a lot of time. They have a big desire to go partying again. And of course, travel retail is still muted at this point. Okay. Very clear. And then my second question, it goes to the so the Matrix Plus membership that you have introduced as free shipping and a lot of other interesting stuff. Two things two questions to this. You have 36,000 members now. How is that according to expectations? Is that a satisfying level? And the second question is, how much is free shipping really being used? I can see in the report that it is clearly being used from your comments. But how much is this something that is visible in the margin? That was my question. Thank you. So for those of you who don't follow us closely, Club Nexus Plus is a new concept where if you pay SEK 29 per month, you get free shipping. You basically gear your points earnings in the loyalty club, so 3 times up, and then you get a lot of other sort of one off kind of advantages. And we disclosed that we now have 36,000 subscribers. I think that's a pretty compelling number to go from 0 to 36,000 paying members. What does it do for our business? It clearly increases our share of wallet. So customers who do become Clubmates as a plus, they shop with us more frequently, and we get a bigger annual basket, if you will, a bigger revenue chunk from those members. And they choose a bit more home delivery, and obviously, they're getting some good discounts. But overall, it has stood the first test, namely do the consumers want this? Yes, they do. And we will continue to develop the concept as we go. If you just look at the report in more detail, you realize that we do comment on the fact that the one place that we could see a bit of an effect in the numbers is on the online part of the business where we've had a drop in the average basket. And so a high frequency, but lower baskets. And that does have at least some of that comes from the fact that drop method stop in, but because they have free shipping are likely to order in smaller batches. And that's obviously the part of what happens. But to have to see that to say that it has had an overall effect on our overall business, it really didn't have the volume yet to do so. Okay. Thank you, guys. Guys. We have a follow-up question from Max Fisko from Carnegie. Please go ahead. Yes, thank you. In terms of delays on deliveries, have you seen anything in this quarter due to your solid activities? I guess, when you ordered in Q1 of matters, you shouldn't expect to get your order at the next day. So have you seen any delays on deliveries in the current momentum, the current activity? No. We have actually seen the reverse. We've seen more and more speedy delivery and more and more percentages of the individual orders getting fulfilled on the same day. So the learning curve that we have in Hummelweg just continues to go in the right direction. So despite a lot higher online activity ramp up compared to just 2 years ago, we have been able to cope with that. And we also see customer satisfaction on Matrix DK running at the record highs. All right. Thanks. And as there are no further questions, I'll hand it back to the speakers. Thank you, operator. I just want to remind you that this is not the end of the day. It's rather the beginning of the big reveal. We will talk about our new strategy in just a few minutes. So please stay on the line. We will start at 10:30 sharp and look forward to seeing you again there. Thank you.