Earnings Call: Q3 2019

Feb 7, 2019

I must advise you all that this conference is being recorded today, Thursday, 02/07/2019. Without any further delay, I would like to hand the conference over to our first speaker for today, Mr. Gregor Sveldel. Please go ahead, sir. Thank you so much, and good morning, everyone. Welcome to our presentation covering the 1839 financial year. With me is Anders Goulders Jensen, our CFO and Elisabeth Finhorn, Head of IR and Corporate Affairs. I will start out with a few high level comments on the quarter, after which Anders will take you through the numbers, the Q3 numbers. And finally, I will talk a bit about our strategic progress and the initiatives that we launched in the quarter. As usual, we will end with comments on the outlook for twenty eighteen-twenty nineteen and finally a Q and A session. Please turn to Slide two. The quarter overall was in line with our expectations and increased characterized by good strategic progress on a number of areas. We completed notably the acquisition of Firtal Group on November 13. It's a transaction that more or less doubles our online turnover compared to the full year twenty seventeen-twenty eighteen. For the quarter overall, we increased turnover and continued high organic growth rates on digital, and we were able to also drive positive like for like growth in the quarter. Earnings, as you know, were down because we have decided to fast forward our digital action plan growth plan and decided to add more resources to digital to be able to drive future growth. Let's have a closer look at the numbers. Revenues for the quarter came in at DKK1.92.6 billion, an increase of 1.7% compared to last year. The majority of the increase came from the acquisition of Revenue from Firtal is in the numbers from November 13. Like for like growth reached 0.5% for the quarter, up from a decline of 0.8% in Q3 last year. The growth was driven by strong development in the online sales on matas.dk, which reached 55% for the quarter. We are quite satisfied with this continued high growth on matas.dk and we have, as I mentioned, allocated more resources to this area in the quarter. Earnings came in at million, a decline from million last year. And this decline was driven by proactive decision to invest more in online and also be competitive on our campaigning. The EBITDA margin before special items reached 18.8%, down from 21.1% last year. And the margin EBITDA margin was 16.7 year to date, which was well in line with our guidance for the year and EBITDA margin in excess of 15%. And with that overall introduction to the quarter, I will ask you to turn to Slide number three and hand over to Anders for a deeper look into the financials. Thank you, Gregers. Let me begin by giving you a little bit more detail on the revenue development. As Gregers mentioned, revenues increased from $1,075,000,000 to $1,093,000,000 euros and it was driven primarily by the FuelCell acquisition and continued strong growth online. If we look at the specific areas, sales of beauty products grew 0.6% year on year in the third quarter, driven by increased sales of high end beauty, while mass beauty declined due to the continued competitive pressure specifically on product cosmetics. The vital areas, sales increased by 19.4% year on year. And of course, that was primarily due to the acquisition of Fusel, but also driven by fairly strong sales and strong campaigns in the quarter. Sales in the material area decreased 4.4% driven by a reshuffling of campaigns and intensified competition. Finally, Medicare dropped by 1.9% primarily due to lower sales of nicotine gum as competition from supermarkets and discount is intensified in that specific area. The gross margin came in at 44%, let's just say 44% in the third quarter, which is down from 45% last year. Decline was, as Greg has already mentioned, primarily due to our decision to invest in competitive campaigns in the quarter. Total costs, excluding special items, rose by 6.9% in the quarter compared to the same quarter of last year. The increase came both from other external costs and from staff costs. And I will revert to this in more detail a little later. Following the decline in gross margin and the increase in cost EBITDA before special items was, as mentioned, realized at $2.00 €6,000,000 against $227,000,000 in the same quarter last year. Lower gross margin and the increase in costs led to a drop in adjusted net profit to around €140,000,000 in the quarter compared to 155,000,000 last year. Free cash flow was €127,000,000 which is a marked drop from the €237,000,000 generated in the third quarter of last year. But of course, the free cash flow was negatively impacted by the acquisition of Firtal Group. Cash flow from the operating activities were actually slightly higher than last year. If you look at the number of transactions in our stores and online, they fell by 1.3% in the quarter compared to the same period last year. But on the other hand, we continue to see a growth in the average basket, which was up by 2.5% or slightly above DKK4, that's DKK4.4 per transaction. With that, please turn to Slide number four. On Page four, you can see the sort of longer term development in revenue growth, gross margin, EBITDA margin and the level of inventories. As Craig has already mentioned, the quarter had a positive underlying like for like growth of 0.5%. However, if we look at the twelve month trailing like for like growth, it remains in negative territory, although the decline is tapering off. If we look at gross margin, the twelve month trailing gross margin declined 0.3% in the quarter from 44.9% at the end of last to 44.6%. Long term trend for the EBITDA margin before non recurring items remains negative with a decline of 0.7% from 16.1% to 15.4% in the quarter. Finally, if we look at our inventory level at the end of Q3, it was 900 just above $900,000,000 which was frankly too high and not in line with our expectations. The increase was partly driven by the acquisition of Firtal, which added roughly $30,000,000 to the numbers, but also an increase in the number of SKUs we stock and also a few new stores. In the quarter, this quarter we're in right now, we have initiated plans to curb inventory levels. With that, please turn to Slide number five. As we've already covered the first few lines, let's start with just a closer look at costs. So I already mentioned total costs include excluding special items rose by 6.9% in the quarter compared to the same quarter of last year. Other external costs rose by 9% year on year, driven by increased marketing costs, primarily from the addition of marketing costs from Fierce Group, but also the high growth in online sales led to an increase in fulfillment costs, while we actually had a slightly positive impact from lower rents. Staff costs rose by 3.2%, primarily driven by increased costs related to the online business, that's both Vertel and Metas. Dk. In the quarter, there were also some costs related to redundancies that we made. Special items declined, actually see that here, you can see it in one of the previous pages, declined to 1,300,000.0 from 5,500,000.0 in the third quarter of last year. That quarter was the number was higher because we closed off both Stylox and Formesa stores. If we look at the effective tax rate, it was unchanged at 22% in the quarter. Profit for the period after tax came in at €122,000,000 which compares to the €134,000,000 in Q3 of last year. With that, please turn to Slide number six. On Slide six, we look at cash flow development. And as you can see, cash generated from operations amounted to an inflow of €337,000,000 in the third quarter, slightly higher than the year before. CapEx and investments stood at $139,000,000 which is an increase of $116,000,000 from the same quarter of the years before. As already mentioned, the main reason was the acquisition of Firsen, which was completed in the quarter resulting in a payment of 111,000,000. As a result, the free cash flow was 110,000,000 lower than in the same quarter before. And free cash flow stood at €127,000,000 in the quarter. With that, please turn to Slide seven for a look at our progress on strategic initiatives, which I will leave you to Duplex. Thank you, Anders. As for the strategy renewing Matas, we are very pleased with the progress in this quarter. We have made progress on every single one of the five tracks in our strategy. We have headlines on this slide. And if you turn to Slide number eight, I will dig into the first one, which is live our purpose. So in the quarter, we have continued our successful rebranding campaign or revitalization campaign of Matas, and we have been preparing our seventieth anniversary, which will take place over the next quarter. We are have been in preparation mode with the new store concept. And actually today, we are unveiling a range extension of our private label brands, the Stripes, a new design and a range extension. We're very happy to see that out to the market. If you please turn to Slide number nine. In Online, as we already mentioned, we continue to see this strong momentum from the strategy that we launched earlier last year in digital. For the nine months up to the third quarter, we have been growing 54% and that has made us move forward the growth plan for digital and add more resources to digital so that we can continue to win market share in that space. If you please turn to Slide number 10. With the stores, we have been working in the engine room. And as we have told you before, before the summer, we will be unveiling our new store concept. We look very much forward to that. And besides redesign of the store and how rethinking the entire store experience, we are also doing a lot of changes to the assortment and to how we operate the stores and also working actively with the store network. If you please turn to Slide 11, on the strategic track on growth on the Capital Markets Day, we announced that we would aim for winning a bigger share of the green market. And we have primarily due to the acquisition of Firtal, delivered 19 plus percent growth in Vital in Q3 and made a step change on that particular track. So, there as well, we are pleased with the progress. If you please turn to Slide 11, change how we work. We have made some changes to management. We have a new commercial chief Commercial Operator on board from October 1. She will focus on category management, on pricing and promo and on our processes to make our commercial processes more lean and effective. We have also brought on board, starting January 1, a new Supply Chain Director with a very strong track record in retail and lots of different fields in retail. His focus will be on inventories, but also on thinking ahead on our omnichannel fulfillment and our capacity to deliver both to the stores and to direct to the consumer. And then finally, we have continued as you can tell from our accounts, we have continued our focus on operating our stores even leaner in this quarter. If you please turn to Slide 13. Our guidance for the year. Revenues revenue guidance, we have an unchanged level for the underlying revenue for this financial year compared to last year. And we have a specification that we expect the like for like growth to be between minus 05% to plus 05% compared to the previous guidance of plus 1%. We are up till the end of the Q3 at zero like for like growth for the first nine months. We expect EBITDA margin maintain the guidance and EBITDA margin before special items to be above 15%. We are currently at 16.7% for the first nine months. As for CapEx, we maintain the same guidance as before, CapEx in the range of DKK110 million to DKK130 million and total investments including the purchase price for Firtal between DKK240 million and DKK260 million. Finally, we reiterate that we will expect to pay a dividend for this financial year. And as stated in the Q3 report, Firtal Group has been included in our accounts from closing, meaning that Firtal will be fully in our Q4 numbers. Please turn to Slide 14. And with that, we have concluded our presentation, and we are ready to take your questions. I will hand over to you, operator. Thank you, ladies and gentlemen. We will now begin the question and answer session. And we've got two questions on the line. First question comes from the line of Michael Rasmussen. Please ask your question. Yes. Thank you very much. Michael here from ABG. So firstly, if you could discuss a little bit on the stores. Is it right to assume that you opened two stores during the quarter? I think that you have left out the normal talks about stores in the release. And staying on the stores, if you could please tell us how the development has been in the nature of Matas Natur stores so far. If you could talk a little bit about the number of stores that you plan to refurbish or upgrade in the fourth quarter, including costs on that? And then also if you could if you're planning any closures of stores going forward? Thank you. Okay. Thank you, Michael. As for new store openings, you'll find it on Page seven of 22 in the report. We're opening one we have opened one new store in Ulby, and we have expanded one store in Vandruzh, and that's for the quarter. Development in store sales was slightly down in stores, but we don't give out specific numbers on that. But, Gregers, when you say slightly down, is that for Matas Nature, the Nature stores that you're talking about? No, that's not the overall. That's not the overall. Matas We don't doubt the information on Matas Nature. We so judging Matas Nature, we are very happy with the overall progress of the Matas Nature initiative. We have no plans, and we have had no plans of expanding the two stores. They serve a very specific purpose of both the marketing purpose, but also a purpose of being able to source new brands and experiment with the customer experience and the target group that is interested in Matas Nature. And what we will use those two stores for is to the learnings that we have from those two stores, we will take the best part of that into our Blue Matas. But we have no plans of expanding Matas mature stores at this point. And I think just to add, I mean, they are insignificant in the big picture so that you don't need to worry that they're sort of making a big owned account. That's a good point. Very significant. And on the refurbishments? As for as for the refurbishment rollout, we don't give out any specifics other than what we said already that we will be opening the first stores in in the new concept before the end of the financial year. But we don't give out any numbers or details on the overall rollout plan. Great. Talking about your staff costs now with you hiring in a new CCO and a new Supply Chain Director. And in general, I understand that the IT guys are a little bit pricier than your normal store staff. Should we expect staff costs to come up slightly in the next couple of quarters? The management changes, there have been direct changes of management and getting new management on board. So on that specific accounts, no. But what you see in the quarter that we add resources to fuel specifically our online and to sustain a high growth rate online, yes, you should expect something. In parallel with that, we have efficiency programs to make sure that our headquarter cost is kept in control. Okay. But generally, Michael, we we we can't sit and discuss That would be like guiding through the backdoor, and we're not going to do that. On the net working capital development, obviously, I heard you say, Anders, that you will be looking into the inventories. But just kind of thinking conceptually about this, as you grow online, what will this mean to your inventories and also receivables going forward? I would assume that the inventories would go up, but at the same time, your receivables would decline. I don't think it's going to have much of an impact on the receivables, to be honest. I mean, online are just like cash sales. There's not really a big difference. As to level of stores stocks or inventory, sorry, it could be argued, obviously, as we have been arguing that to some extent when we are expanding the number of SKUs that we operate, that has an impact on inventory levels. However, it should also be noted that you can do so online rather more cheaply than if you do it in the stores. So it's much more expensive to introduce a new brand in our stores than it is just to introduce it online. So the effect is rather smaller. I mean, yeah, there is the effect of when you grow the business, of course, obviously, there's some kind of risk that you might grow your inventories a bit. But there are also some other factors at work here. And obviously, as we pointed out, the inventory level at the end of Q3 was basically too high for our liking. And we have set concrete actions in place to make sure that we will curb inventory levels in the quarter we are in right now. Okay. Thank you so much. Thank you. Our next question comes from the line of Paul Jessen. The line is now open. Please ask your question, Paul. Thank you. A few questions about this other cost and the staff cost. Paul, could you could you we can barely hear you. Get really close to the mic. Yeah. That's good. Better. Thank you. Okay. Headphones, that's not the best. Now question questions were about the the staff cost and also external cost, which year over year was up a lot, but it can't be Firtal, all of it, given the revenue levels of Firtal. So can you say something about the recurring nature of these additional costs for online front filling and marketing and so on looking into the coming quarters. That was one question. Then on Firtal, can you say something about seasonality on the business? I would assume that it's more stable and less cyclical or seasonal than the rest of the business. And then you have severance payments mentioned. Is it material or is it just something you have to mention? Thank you. On the online, because there's no doubt that as we grow the online business as aggressively as we have been doing, there are some fulfillment costs that are carried through in the system and that will affect numbers. And obviously, that's something that if you have if you call costs very high growth online, you will also have to take that into consideration basically because there are some costs associated with the picking and packing and so forth of the goods there. So there is a direct link. As to the costs associated with people there, we mentioned it because it's is it a significant number? Not in the greater scheme of things. But with respect to that particular line cost line, yeah, you can see there's a difference, and it's part of the explanation. And whether or not that will be of a recurring nature, yeah, some of it is a recurring nature, as you know, also but will have swings from quarter to quarter. That's the nature of the game. And you're right in assuming that Firtal is less seasonal than the rest of the business. Okay. And then you talk about increased competition in the Materials segment. Is that supermarkets that's pushing that? It's both supermarkets and and our our friends from Jotlin as well. Okay. So we're the you know, there's a lot has happened in that, in that area, so we we just see there is some increased competition. We do see some online movement as well in that space. Okay. And, I guess you don't want to give more insight into the Firtal impact on the different cost lines. No, that is correct. Or the gross margin, how it's impacted at all? Do they have gross margins in line with the rest of the business? We don't guide on specific on their gross margin. As we say, we're looking at a business that has a that we're looking to have an EBITDA margin of more than 11%. But that's as far we're going to go. Okay. In the greater scheme of things, it's not really going to make a difference if they're 1% higher or lower in gross margin, to be honest. Oh, no. Okay. Thank you. That was all for me. Thanks. Thank you again, ladies and gentlemen. It's star and the number one should you wish to ask a question. No further question at this time. Please continue, sir. Thank you so much for taking the time today. As always, you can reach out to, Elizabeth if you have, further questions. Have a nice day. Bye bye. Bye. Thank you. That does conclude our conference for today. Speakers, please stand by. Participants, you may all disconnect. Thank you for joining.