Earnings Call: Q2 2020

Oct 30, 2019

Ladies and gentlemen, thank you for standing by, and welcome to today's MATA Second Quarter 2019 2020 Conference Call. At this time, all participants are in listen only mode. After the speaker presentation, I must advise you that this conference is being recorded today on the 30th October 2019. I would now like to hand the conference over to your speaker today, Gregor Sverdrup Waddelsbach. Please go ahead. Thank you, operator, and good morning, everyone. Welcome to our presentation covering the Q2 of the 2019 2020 financial year. With me on the call today are CFO, Anders Frode Sorenson and Insoberte Pimpon, Head of IR and Corporate Affairs. I will start out by giving a short comment on the highlights for the quarter, then Anders will take you through the presentation of our 2nd quarter results. And finally, I will comment on the strategic progress on 3 out of 5 strategic tracks as well as on the outlook for the financial year. As with Q1, this quarter is impacted by the implementation of IFRS 16. We will, however, comment on the numbers on a pre IFRS 16 basis, unless we mentioned otherwise, in order to be able to make comparisons and explain developments compared to last year. We look forward to taking your questions at the end. Please turn to Slide number 2. The highlights for this quarter was overall top line growth of 5.8 percent, like for like growth of 0.3%. Earnings were stable at $107,400,000 compared to 100 and 8,600,000 same quarter last year. The gross margin and we will return to the gross margin. The gross margin was stable underlying, including a normalization from Cosmonet, the company we acquired. So 44.7% against 44.9% of last year. Notably, we had the 6th consecutive quarter of growth on MACESDK with more than 50% growth. Also, we have decided on a rollout plan for the new store concept, Matrix Live, based on the test results. I will change that. Finally, we have narrowed the range for our 20 nineteen-twenty 20 guidance on top line and like for like, and we have a lower CapEx guidance. I will return to each of these in more detail later. Please go to Slide number 3, where Hannes will go through the financials. Thank you, Gregor. On Slide 3, which will eventually turn up, we saw an increase in revenue of 5.8% from SEK 777,000,000 in Q2 of last year to CHF 823,000,000 in Q2 of this financial year. Growth was obviously impacted by a number of factors. On the positive side, we saw the revenue from Fiatep coming into the numbers. As Craig has mentioned, we saw strong online growth of more than 50%, 53%. And we also had a small positive impact of 1 more trading day lifting sales slightly. On the negative side, the distribution of trading days in the quarter was less favorable than in the same quarter last year. And the sale of seasonal products, in particular sunscreen, were lower than we saw in the same quarter last year, where, as I think you all know, the glorious summer weather meant that we had record high sales of these types of products. Overall, revenue for the quarter were a little lower than expected with like for like growth of only 0.3%. With higher overall sales, of course, we also saw an increase in gross profit, which increased by 2.4% or DKK8 1,000,000. The gross margin headline gross margin for Q3 was 43.5%, down by 1.4 percentage points from 44.9% in the Q2 of 2018 2019. However, this decline in the gross margin was primarily driven by a nonrecurring effect in connection with the customer led acquisition. The new Azure products being recognized only when they're sold out of Mesosource. Before the acquisition, Cosmo led recognized profits on the sale of products to the Mesos Group as and when that happens. As a result of the Matrix acquisition of customer led, during a transitional period, profits on the sales of customer led products will not be recognized in the books of The Matrix Group. This does not have any cash flow implications, but it has technically decreased the gross margin of the group in particularly the Q2. Please see Note 5 to the accounts for further detail. As the effect is a non recurring, we have chosen to normalize for it in order to actually explain to you what happens with our gross margin underlying. The normalized gross margin was 44.7%, with the small drop of 0.2% compared to the same quarter last year, being caused mainly by lower sales of sunscreen products in this quarter, as I already mentioned. On the cost side, overall operating costs before IFRS 16 rose by 20,100,000 dollars Added costs from fuel cell and customer lift and special items in the quarter amounted to an increase of $23,400,000 In addition, increased activity in our online business led to an increase in costs. Later in the presentation, Craigas will give a little more of a deep dive into the cost development, so I won't talk more about that now. EBITDA before special items was stable, as mentioned, at €107,400,000 against €108,600,000,000 with Q2 of last year. Adjusted net profit was also stable at DKK61 1,000,000. We saw a drop in the number of transactions of 3.5%, And at the same time, we compensated by growing our basket size by 3.9% or 5.9% over 6 inches kronor. Overall, in the quarter, we continued to see traffic moving towards online, where Matrix is very well positioned to serve our customers through both Matrix, our Matrix C Co workshop as well as through the workshops operated by the PIA Tech group. In our physical stores, we continue to see declining footfall, which we were able to partially counter by an increase in basket size. With that, please turn to Slide number 4. On Slide number 4, we'll just take a brief look at the category performance in sales. In the Q2, we saw the trends from previous quarters continuing with Beauty overall increasing by 3.5%. Beauty announced to 2 thirds of sales. This quarter, mass beauty, however, saw sales increase by 2%, which is better than we've seen for a long while, while high yield increased by 5%, which is a continuation of the trend we've seen. As you are probably well aware, mass beauty has been declining for a number of quarters, but we are pleased to see that our efforts to stabilize this category are paying off. FIFO sales increased by an impressive 29.6%, but that, of course, is mainly due to the Pytel acquisition. But also, sales growth within Metis were positive. And this is good because this is an area where we've been putting more focus on growing the category. The material business, which is fairly small, decreased by 4.1%, actually primarily due to seasonal sales being lower than the same quarter last year products that is. And finally, sales in the small Medicare segment increased by 2.5%. With that, please turn to Slide number 5. On Slide 5, we look a little bit on the longer term development in revenue growth, gross margin, EBITDA margin and the absolute level of EBITDA. The numbers pretty much speak for themselves, but I would just note the following. As to the underlying growth method is now back on a growth path, albeit only marginally so. With regards to our underlying gross margin, the stable trend is continuing. On our EBITDA margin, the declining trend is becoming weaker than we've seen. And finally, on revenues overall, Medjet is growing again, and we are beginning to see a stabilization of our nominal EBITDA, I. E, how much we are earning in Danish kronor. With that, please turn to Slide number 6. On Slide 6, we have shown the development in our cash flow and the level of inventory as one of the main elements of our working capital. Please note here that figures are all shown pre IFRS 16. Cash generated from operations, including changes to working capital, increased DKK16 1,000,000 to DKK63 1,000,000 in the quarter compared to the same quarter last year. CapEx was a bit higher, growing by $3,000,000 year on year to $39,000,000 CapEx was driven by investments in the Netflix lifestyle projects, by investments in our new web shop in Home Lubeck and by ongoing investments in our business, for instance, in our online capabilities. Free cash flow rose DKK7 million to DKK13 million in the quarter. As to inventories, they rose by DKK120 million when compared to the same quarter last year. A big chunk of this, around $75,000,000 were directly related to the acquisitions of Fiacel and Customolit as well as the establishment of the new workshop in HomeGoods, while the remainder was primarily caused by the introduction of new brands into the business and of LINE extensions. With that, please turn to Slide 7, where Craigas will talk about our strategic program. Thank you, Anders. And this quarter, I will comment on 3 of our 5 strategic pillars. The strategic pillar relating to online, as you know, our ambition is to to position Matrix to be the undisputed market leader in the online space, to be the 1st choice for customers online as well as offline. The second one is our strategy for the store portfolio, where we are working to renew and consolidate our store footprint. And finally, I will give a bit more detail on the strategic track that we call Change How We Work, which is all about taking out efficiencies in the business. Please turn to Slide number 8. As for online, we have been quite aggressive from the beginning that we want to be number 1 and the first choice for consumers. The first step was to fuel our organic growth on Matrix DK and make sure that our omnichannel proposition is working well. We are now in a position to say that we are number 1 in the beauty and well-being space. We have seen continued growth in 20 eighteentwenty 19. We saw 54% growth on MAGES DK. And in the first half of twenty nineteen-twenty, we saw 59% growth on MAGES DK. We don't have firm numbers on the market development. We estimate that the market overall grows between 20% 25%. So as you can tell, we are very significantly outgrowing the market pace for the online segment. Step 2 in our online strategy was the acquisition of Beotel. We have completed that acquisition. We have Beotel fully in the numbers now. And I'm pleased to say that performance with Beotel is as expected in our investment case. We see that the team are as strong as we hope they would be and we see a continuation of their business along the lines of our investment case. Also, the synergies that we aim to realize on purchasing and marketing, we see on track. And we are firmly number 1 in the visor space with the acquisition and FioreTel together with the Matrix acquisition. It doesn't end here, and there is a long way to go on the online business. Our aim is undisputed market leadership to be the 1st choice. So on the basis of the results that we have seen, we will increase investments in organic growth, both in METAS and in Fiorentel. We also see that the Fiatel platform is strong and that we can bolt on acquisitions, make small size bolt on acquisitions with very short term payback and that is something that we have in scope going forward. So overall, for online, we have increased our CapEx allocation to make sure that we succeed on this very important strategic trend. Please turn to Slide number 9. In the quarter, we have been able to make the first evaluation of our Matrix Live store concepts and the purpose of the test that we have been making is to decide what kind of rollout we should do. We have opened the 10 Matrix Live! Stores in existing or new locations, relocations that is, from March to July and we have opened 5 additional stores in October. It's still early days, but we are now able to evaluate the store performance on 3 parameters. 1st, we gauge the customer response by very systematic qualitative and quantitative follow-up. 2nd, we look into every local market to assess what's the right thing to do in each of the places that we have stores. And obviously, we look at the full set of financials, whether it be sales uplift, changes to the mix or what it costs to operate stores so that we have a clear picture of the financial returns of our investments. We are now able to draw a few initial conclusions. The first one is related to store mergers, relocations and expansions. So we have a number of cases where we have maybe 2 stores in the town and we see that we get very solid financials from full mergers live openings when we merge, relocate or expand a store. So we're able to deliver to that town a better assortment, better service than before. So that has increased our appetite on consultation of stores. We will spend the CapEx that we have expected on these kinds of remodels. And you should be aware that this takes a little bit longer than just renewing the stores that we already have because we need to find the right location and we need to negotiate with the landlords to make sure that we get the support from landlords to co finance store investments. But we are optimistic about that and we see a number of opportunities to do that. 2nd, conclusions for the 1 to 1 store upgrades. We see 2 kinds of results from that. We see a number of stores, types of stores and locations where we have a good case for modernizing 1 to 1. We are also aware and we see an increased willingness from landlords to co finance investments in doing and making these stores more attractive and we don't want to rush it. We really want to make sure that the changes to conventional retail and the openings or the opportunities to get better lease terms are something that we negotiate when we decide to invest in a store. What we also see is that in some types of stores, we can get the same kind of results with a lower CapEx. So we don't need to do a full makeover of the store to get better results from the stores. So overall, we're going to spend less CapEx on 1 to 1 upgrades going forward. We plan 7 additional Mexus Life stores for Q3 2019 2020, and we plan up to 10 stores in Q4 2019 2020. And this decision on the Matus Life concept is what lies behind our lowering of the CapEx estimate for the year. Please turn to Slide number 10. Since we announced our strategy, we have had a track in our strategy related to our ways of working, focusing on cost saving and efficiency gains. In Q2, we saw those initiatives kicking in for the first time in a significant way. And the purpose of that is to make sure that we run our existing, our classical business with more and more efficiency and effectiveness to make sure that cost at store level develop in line with sales and to make sure that our HQ overall doesn't outgrow the sales long term. So for the year, we expect a result or an effect of $25,000,000 for this financial year and the benefits of this program will carry forward into the next tight knit year as well. The savings come primarily from stores, but also costs at HQ are being targeted. So if we start by focusing on Q2, Slide 10 will show you how overall operating costs before IFRS 16 rose at $20,100,000 in the quarter. And as Anders mentioned previously, costs from Fiorentel and CosmoNet as well as special items in the quarter led to an increase of $23,500,000 In addition, our efforts to drive further online growth carried with it some extra costs. The implementation of our efficiency program helped reduce the underlying cost base. Let me give you a bit more detail on that. So if we look at the 2 kinds of costs that we have, other external costs rose $1,500,000 overall in the quarter. Special items in Q2 'eighteen, 'nineteen related to transaction costs in relation to PeerTown Group. They were not repeated as special items only amounted to $1,000,000 in this quarter, primarily related to the transaction costs in connection with the acquisition of Cosmolev and not already accounted for in Q1. Dollars 13,000,000 of the increase is due to added operating costs from the Fiat Group and Cosmolev. So the underlying cost fell around $3,000,000 on other external costs. As for staff costs pre IFRS 16, they were up $13,000,000 year on year in the quarter. Special items related to executive changes in matters led to an increase in staff costs of $3,300,000 compared to 20 eighteentwenty 19 where there were no special items. In addition, we saw a DKK6 1,000,000 increase in staff costs from Fiatal and CosmoLift. So underlying staff costs rose by DKK3,500,000 due to higher staff costs primarily in MAGES DK and DHQ to support our online growth and it was tempered by the effects of our efficiency program as previously mentioned. As mentioned, we did expect our efficiency program to deliver further positive cost reductions in the second half of twenty nineteen-twenty twenty and the full year effect for the financial year of approximately $25,000,000 Please turn to Slide 11, where we will finish with a look on our financial targets for 20 nineteen-twenty twenty. We have made two adjustments to our financial targets for 20 nineteentwenty twenty. First, we have narrowed the range, the overall revenue growth and like for like growth in light of a less positive sales growth in Q2 than expected. As a result, our financial targets for 20 nineteen-twenty 20 for these two items are an overall revenue growth of 3.5% to 5.5%, previously 3.5% to 6.5% and an underlying like for like revenue growth of 1.5%, previously 0.5% to 2.5%. Due to the revised plan for the retail network adjustments, we have lowered our CapEx guidance with $50,000,000 to a level of between $150,000,000 $170,000,000 dollars Finally, the efficiency measures implemented in Q2 to reduce cost is expected to have a favorable impact of some $25,000,000 as already mentioned, and the target for the EBITDA margin before special items is maintained between 14% 15%. So summing up for the quarter and the half year, we have completed the first half year with the top line growth, albeit on like for like, a bit short on our own expectations. We are satisfied, very satisfied indeed with our online progress. We have seen the results of Mesoslide and turned that into a rollout plan for this year. And we will continue to test and adjust and fine tune the concept, and we start to see the effects of our efficiency measures as mentioned. Please turn to Slide number 12. These were our comments for the quarter and the outlook for the year, and we are now ready for Q and A. Operator, I hand the line to you. The first question comes from the line of Paul Jessen. Please ask your question. Yes. Thank you. A few questions. First, just a clarification. The cost and the gross margin of the inventories of customer debt is also impacting the EBITDA and EBITDA line, and that makes it the total $15,000,000 in nonrecurring average, just to get it confirmed? Yes, yes, absolutely. We have normalized for it. And as it normalizes, we have lifted the gross profit, and thus, you get the positive effect also on EBITDA. That is correct because we think that actually shows what is underlying the business rather than what technically is in the business. Okay. The follow-up on that one is you say it also will impact Q3. How much should we look for in Q3? And No, I don't think it's going to be very negligible what effect it has on Q3. Okay. Then on the cost cutting where you say $5,000,000 on the full year, what were the stages by the end of Q2? So how much is left for second half? So we don't give that out specific, but we didn't see the full effect in Q2. We served some of the early stages of the effect. So it's $25,000,000 for the full financial year with the majority coming in the last two quarters. We do, as you will note, we do reserve the right to reinvest some of those $25,000,000 in online growth, but it is a real savings. Okay. So it's a gross saving? Yes, it's a gross saving. Okay. Then a question that's on the balance sheet. Just I can see that the lease assets are coming down by $44,000,000 quarter over quarter. Is that a consequence of fewer leases and that means fewer stores? Or is it a consequence of you being able to renegotiate the rents downwards? Let us just revert on that one. And I don't have the answer right here. So I think that some of it is just a technical development over time. As we move along, we have to do some depreciation on the app. But Paul, let us revert to you on that one for a more precise answer. Okay. And then for now a final one, and that's on the CapEx program, where you say that higher CapEx for online, you say lower CapEx for upgrades and then as expected on mergers. And then you changed the current year guidance. Can you comment on the total CapEx guidance you're giving or the 3 year horizon? Is that unchanged? So it's a prioritization and reallocation between the 3 different use factors? That's correct. The overall investment program for the strategy period remains the same, but we have recalibrated. So you are right in your assumption that that is unchanged. Okay. I'll step back then. Thank you. The next questions come from the line of Alexander Edelman. Please ask your question. Yes. Thank you. So a few questions from my side. So the first question is, the 2% decline in your physical stores, is that on a like for like basis? That's the first question. 2% decline? Yes. So you have lower revenue compared in your physical stores compared to last year. Is that because maybe you have closed some stores or is that on a like for like basis? No, there is a small closure of stores, but let me just see exactly what number you're pointing to on the review. Let's see. What exactly number are you pointing to? You're giving some numbers on your physical stores revenue, which declined in this quarter compared to last year. So this quarter was $715,000,000 compared to last year of $732,000,000 Is that because you're doing the numbers on back of the 87% of the 822.5 percent. Is that why you're doing it? No, I'm just taking the difference, the growth. You're taking out the underlying part from the total CL sales. Yes. So it's in the 4% yes. Yes. No, there is. I mean, there is a decline in the physical store sales. That is correct. Yes. And is that on a like for like basis or the same number of No, that is a total basis because this is the account. So closures will also affect this number. But closures is not the main part of what happens. Okay. Okay. All right. Thank you. Yes. And then my second question is that your number of transactions declined 4% compared to last year. I mean, you also asked this before, but are you still not seeing a red sale in your physical stores? No, we are the picture is exactly what we've seen before. And as you've also noticed, if you look at the numbers, we are closing down some stores, but we're not seeing the emergence of a huge red tail in our stores, no. Okay. All right. And then my last question for now. So I think I was a bit surprised by your special items on $14,600,000 I was just wondering if you could put some color to it on how we should actually understand it. What is driving it? So it's driven, as we say, by the 2 things. The main part is not actually a special item. The main part is the normalization of the Cosmo led number, which is amounts to about, I think, dollars 10 point something, dollars 10,400,000,000 dollars So that is what drives the better part of that. And as I've explained, that is because technically, we have this problem with the way that sales are recognized from customer lift. And that's a one off until we start selling the products that we're taking from customer lift. And we've there's a more technical explanation of this in node 5. So the rest is just normal one offs of like 3,300,000 in management changes, for instance, and $4,900,000 in the rest, which is, as I think, Greg has already mentioned, primarily because of some transaction costs concerning customer debt, which weren't accounted for in Q1. Okay. All right. Thank you. That's my question for now. I'll go back in the queue. Thank you. Thanks. Thank you. The next question comes from the line of Paul Jessen. I have 2 minor ones. On the Fiatel acquisition, if we look at the revenue numbers for the 3 quarters where we have numbers by now, it seems stable in the range of $44,000,000 $45,000,000 per quarter from Q4, Q1 and Q2. Is that in the performance in line with what you for? Or would you look for higher growth in the Fetal business? And secondly, on Cosmolet, now that you include external Cosmolet sales in the wholesale line, Is that a very marginal number as that line is down 17% year over year? I know that matters a couple matters as in Cloudera as well, but it's how is it performing actually? Thank you. Yes. So Cosmoletti is easy. The impact of Cosmoletti in the quarter is marginal on the revenues, so insignificant. As for Fiatel, they perform in line with our expectations in the investment case. The category that they operate is slightly more mature online. So they are hitting the numbers that we expect them to hit in the investment case. Okay. And then a final one, and that's on the Mars Beauty, which now I think I could look back, it's about 4, 3 years. It's the first time you have a growth number. Is that because of your initiatives? Or have you seen a stabilization in the market, so you are now performing out of a new level in the market and then potentially growing? Or is it the initiatives you have that is performing better than how the market is performing? It is a bit of both. So we haven't seen a structural change in offline competition for some time now. So there is a new level. But at the same time, we have been working very intensely on the mass beauty category, introducing new brands, adjusting pricing, running our promotions differently. So it is a mix of something structural and something that we are doing. And as you know, sunscreen is actually a pretty big part of mass beauty sales. So underlying, it's actually a quite positive trend. Okay. Thank you. That's all for me. Thank you. The next question comes from the line of Klas Almer. Please ask your question, please. Thank you. Also a few questions from my side. The first is the special items. So you have excluding this normalization, you have around $4,000,000 in special items. And as I understand at least, that is the one driving the $25,000,000 cost savings. Is that correctly understood? No. It's actually not related to the €25,000,000 It is a management change for the major part of the €4,000,000 3.3 is related to management change. So we slim down our management team. But that will give some savings going forward or? That's correct. So what is the nature of these $25,000,000? So it's primarily running the stores more effectively. We have actually since the beginning of the strategy period, we've been working on our operating model for the stores. How can we run the way we run the stores, basically, what we spend time on, how much time do the staff in stores spend in front of the consumer as opposed to in the backroom. That is one and the major part that we are doing things differently in the stores. The other part is that we on headquarter, we are starting to see some benefits of some of the investments that we do in tech that we can run some processes smoother than we've done before. It sustains particularly to our campaigning efforts. Sure. So that means fewer people in the store and fewer people in the back end of the store. That's how it works. Okay. Then second question regarding your CapEx guidance. Now you're delaying these investments or upgrades of stores, as I understand. I thought it was very necessary to upgrade the stores as quick as possible. Maybe I was wrong on that one. No, I think what we've said all along is that we will test first and then we will decide on the rollout plan to make sure that our investments pay off. And it is, Claus, it is still early days to evaluate a concept, but we do see some very clear conclusions. When we do the mergers, the relocations, the expansions, we get a good return and we want to do more of those. When we do the one to ones, the picture is mixed. We see some places where it makes sense to invest in the stores, but some stores we can upgrade at a much lower CapEx. We don't need to do the full remodel. We can do more of a facelift type and get the same kinds of results. So it's actually just a matter of learning from what we're doing and then deciding on our roll out plan based on the specific test results we're getting. And also sort of overarching, Claus, obviously, we are seeing online growing faster, and therefore, we want to put more money into the online investments. Investments. And this is something we've said all along that we haven't got like a 5 year fully fixed investment plan. We want to be able to allocate CapEx to respond to the market trends. Sure. That makes a lot of sense. So could one speculation at least be that given the very strong online growth and maybe a decline in the store network that maybe you are preparing to do less investments in the store network or at least in part of the network? Yes. I think overall, the balance is changing towards more online investments, fewer offline investments, but it's based on the test results that we see that there are some store investments that makes perfect sense and we will continue to do that, But we will stretch it out probably over a bit longer also to get the support from landlords because quarter by quarter, we see more willingness to support the changes in the physical retail environment. And we want to make sure that we get those gains when we don't rush it. We want to make sure that we get landlord support for the investments that we're making in the stores. Okay. That makes a lot of sense. And these investments online, what is that software or warehouse or? Yes. It's 2 things. In the quarter, it's 2 things. It's overwhelmingly, it's software investments. But in this quarter, we also opened a web shop to make sure that we can handle the volumes that we're seeing online going towards Black Friday and Christmas. So we opened a new web shop in Hollenbeck that separates out the operations of our online stores from our physical stores. And that will help us deliver to the customer faster and will actually help us get the cost per order on the online transactions down. Okay. Thank you so much. Thank you. The next question comes from the line of Alexander Edelman. Please ask your question. Yes. Thank you. Just the last question for today. So you achieved 0.3% like for like here in Q2, which implies that you got 0.5% in the 1st year of 2019. And now you're guiding for, I think, it's about 2.5% to 1.5%. And this implies that you at least need to do around, let's say, 1.4% like for like growth in H2 or second half of the year. What's going to drive this like for like growth? Should we believe that you're actually able to achieve this number in H2 since the comparison is going to be a bit tougher? And you had a strong Q4 last year and also Q3 was pretty strong last year. Yes. So a few underlying things and whether you want to believe it or not, that's up to you, but we believe it. The underlying things are there's one more trading day in Q4. And the other thing is that we see FiatL coming into the numbers into the like for like numbers because we completed the acquisition of FiatL middle of November of last year. So instead of contributing with inorganic growth, they now contribute to our like for like growth in half of Q3 from sorry, from December of Q3 and fully in Q4. Okay. So, Fusil, is that going to be the main exit driver compared to a normal business? No, it's a number of different things. But those two things are structurally different from last year, and both of them provide a push in the right direction. All right. That was my last question. Thank you. Thank you. Dear speakers, there are no further questions at this time. Please continue. Thank you for taking the time to listen in to our Q2 results for 20 nineteen-twenty. You can reach out to us later as always if you have any follow-up questions. Our next results update is the trading update on the Christmas quarter. It is due on the 8th January 2020. Have a nice day. Bye. Bye. Thank you. That does conclude our conference for today. Thank you for participating. You may all disconnect. Have a nice day.