Good day and welcome to the Matas Q1 Report 2018/2019 conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Gregers Wedell-Wedellsborg, CEO. Please go ahead, sir.
Thank you, and good morning, everyone. Welcome to our presentation, covering the first quarter of the 2018/19 financial year. I'll ask you to turn to slide three. With me on the call today, our CFO, Anders Skole-Sørensen, and Elisabeth Klintholm, Head of IR and Corporate Affairs. This is the first set of results following the launch of our updated strategy, which we call Renewing Matas, on the Capital Markets Day at the end of May. I would like to start out by offering some high-level comments on the quarter, and then Anders will take you through the numbers. After Anders, I will give a brief recap of the strategy with particular emphasis on what we're actually doing. We will end the call with a short take on the outlook for 2018/19, and then go to Q&A. Please turn to slide four.
The 2018/19 financial year started on a good note. Revenue amounted to DKK 844 million, up from DKK 831 million the year before. like-for-like revenue was up as well, increased 1.1% from Q1 last year. EBITDA came to DKK 133 million. It's a small decrease compared to DKK 137 million last year. However, if you take out the exceptional items, we came in at DKK 138 million, which is slightly, even cosmetically up from last year. Some of the sales progress that we have seen is due to favorable conditions, but most of it actually comes from impact of the strategic initiatives. Let me give you just three pieces of context for the quarterly results. First, this quarter last year was the first quarter where we really felt the impact of a step change in competition.
We consider that quarter to be the quarter where our new reality, if you will, kicked in, and we had a quite weak quarter. That new reality hasn't changed. In fact, we have seen an increase in competition this quarter, both offline and online. Second, the sun was shining. I don't need to remind you, but for those of you listening in from elsewhere than Denmark, we've had a good weather conditions, and that is really a double-edged sword for retail. On one hand, historically, when we've looked at the numbers, when the sun is out, people tend to stay home, and there's less footfall, less traffic to retail overall. In that case, we lose some impulse traffic when the sun is out.
On the other hand, as many have noted, we get bumper sales in sunscreen, we just launched a new series right before the quarter, so that was a happy coincidence. However, on balance, we do consider that the sunny weather has given us a small net positive. Third, we had one more trading day in the quarter, but that was balanced out a bit by a less favorable distribution of trading days overall. We estimate that the positive calendar effect contributed around 0.5 percentage points of the underlying growth. Against that background, we are particularly pleased with three elements in our results. The first one is that we have seen a 2.3% increase in transactions. For those of you who have been following Matas for a while, this is the first time in three years that we can post a significant increase in the number of transactions.
Second, our digital ramp-up, our Matas 4D strategy, which we launched in February, is actually paying off faster than expected, and we are very pleased to report a 50% growth online. That is the highest jump in absolute numbers on record for us. Third, I will note that we have delivered these results and this growth while containing costs. We set in place a savings plan before Christmas, and the benefits from that savings plan was reinvested in new growth. We are happy that we have been able to contain costs and that we have also been able to counter some, if not all, of the gross margin pressure, thanks to the support of our suppliers and the dialogue that we've had with suppliers. As a result, we have maintained the EBITDA margin before extraordinaries at 16.4%, the same level as the quarter last year.
From my point of view, we consider this quarter a good first step with faster than expected progress online. With that overall introduction, I will ask you to turn to slide five and hand over to you, Anders, for a deeper look into the financials.
Thank you, Gregers. Could you please turn to slide number six? Before we start, let me just point out that as of the first quarter of this financial year, we have implemented IFRS 16 in our numbers. The main effect has been a change in the way we account for our loyalty card scheme at TopMatas. The numbers implementing IFRS 16 has meant that sales, as well as cost of goods sold, has increased, leaving us with unchanged profitability, but technically higher turnover and a lower gross margin. The first quarter, the numbers have moved approximately DKK 10 million, and in order to compare apples to apples, we have restated our 2017/18 numbers so that they now reflect IFRS 15. This has increased turnover into one of the last financial year by DKK 9.9 million, so that it has moved from DKK 821 million-DKK 831 million.
You can read more about IFRS 15 in our accounts, specifically note number one if you wish to dive into the details. That covered, let me get back to the numbers. Let me begin by giving you a little more detail on the positive revenue development. The increase from DKK 831 million to DKK 844 million was primarily driven by improved sales from both the high-end and the vital areas. Sales of high-end beauty products grew 4.5% year-on-year in the first quarter, while vital sales, that is the dietary supplements, vitamins, and so forth, were up by 7.4%. Mass beauty sales were marginally up by 0.4% in the quarter. They were negatively affected by a drop in the sale of makeup. They are also called cosmetics.
However, the solid growth in sunscreen sales, no doubt, as mentioned by Gregers, helped by the beautiful weather and our well-timed introduction of a renewed line of our own Stripes sunscreen products more than compensated for the drop in makeup sales. In addition, we saw, as mentioned, a strong development in online sales, which were up 50% in the quarter, showing that the initiative to boost Matas online are already beginning to pay off. Gregers will get back to this in more detail later. Gross margin stood at 45.2% in the first quarter. The development in the gross margin was slightly negative, with a drop of 0.4 percentage points compared to the same quarter of last year.
Drop in gross margin reflects the highly competitive market we are operating on and the fact that our campaign share, which is share of overall products sold on promotion, was up in the quarter. We continue to see a growth in the average basket, which was up by 1.6%. However, in this quarter, the growing basket went hand in hand with decreased footfall as the number of transactions in our stores and online grew by 2.3%, corresponding to 120,000 extra sales in the quarter. As mentioned, this is the first time in more than three years we have seen a significant growth in the number of transactions when measured year-on-year in a quarter.
If we exclude the non-recurring cost, approximately DKK 5 million that we incurred in the quarter in connection with the changes in management, total cost in the first quarter rose only very marginally by around DKK 1 million compared to the same quarter of last year. The EBITDA, again, adjusted for non-recurring costs in the first quarter was thus realized at DKK 138 million against DKK 137 million in the first quarter of 2017/2018. When we mentioned that meant that our adjusted EBITDA margin was realized 16.4% in the quarter, which is exactly the same level as last year. Return on invested capital was 11.4%, this is down from 12.9% in the year earlier period. Return on invested capital is measured on a last 12-month basis. While the drop is significant, the decline is tapering off.
As you can see, our adjusted net profit was DKK 90 million in the quarter, marginally above the DKK 89 million we realized in the same quarter last year. Finally, our free cash flow of DKK 73 million, a marked improvement on the DKK 33 million generated in the same quarter last year, with the bulk of the difference being accounted for by less of a drag to the net working capital, but more on that later. For that, please turn to slide seven. On slide seven, you can see the longer-term development in revenue growth, gross margin, the EBITDA margin, and the level of inventories. As Gregers has already mentioned, we saw positive underlying like-for-like growth in the first quarter for the first time since second quarter of 2017/18. Obviously, 12 months trailing like-for-like growth remains in negative territory.
If we look at gross margin, the trend in the data is positive. Gross margin in the last three quarters have all been above the level of the second quarter of 2017/18. However, we are still operating on a highly competitive market, and we do not foresee a letup in the competitive pressure in the foreseeable future. With regards to the EBITDA margin before non-recurring items, the long-term trend is still negative as low growth and pressure on the gross margin has taken its toll on profitability. Gregers will come back to you on our EBITDA guidance for the present financial year, which, and I don't think I'm really revealing anything here, remains unchanged. As to inventories, the growth we've seen over the last year has been linked to an increase in the number of SKUs we stock as we develop our assortment by introducing more brands.
Let me point out that we do not look upon the rise in inventories favorably, and we have set ourselves the clear target that the trend will be broken during this financial year and that inventory levels must be curbed. That please turn to slide eight. Slide eight is the income statement. As we have already covered the first few lines, let's start with Staff costs, including one-off costs, were realized at DKK 175 million, which is DKK 2 million above last year. However, exceptional items accounted for DKK 5 million in the quarter in connection with changes in management. Underlying, there was actually a drop in staff costs. Adjusted for exceptional items, staff costs stood at 20.2% of sales in the quarter, which was down from 20.8% in the first quarter of last year.
Other external costs rose by DKK 4 million compared to the same quarter last year, in part due to the increase in online sales and in part related to the management changes. The effective tax rate was unchanged at 22% of the quarter. That was the same as last year. The profit for the period after tax was at DKK 71 million, slightly down from the DKK 74 million of the first quarter last year. With that, please turn to slide nine. On slide nine, we look at the cash flow development. Cash generated from operations amounted to an inflow of DKK 105 million, which is up DKK 29 million from the same quarter last year, again, with the bulk of the difference being accounted for by less of a drag from the net working capital.
CapEx stood at DKK 25 million, which was actually a drop of DKK 7 million from the first quarter of last year. There were no acquisitions made in this quarter, whereas in the first quarter of last year, we did buy two small associated stores. That all meant that our final free cash flow, as already said, was DKK 73 million, a solid improvement on the DKK 33 million generated in the same quarter last year. With that, please turn to slide number 10, and I'll hand you back to Gregers.
Thank you, Anders. I will just spend a little bit of time recapping the essence of our new strategy. I refer you to the presentation from our Capital Markets Day for a full presentation, and these are our initiatives. Please turn to slide 11. On May 30th, we launched our 2023 strategy named Renewing Matas. The outset for that strategy is that we expect the retail environment and the competitive environment to be pretty tough and with low clarity. However, we do think that this is an opportunity for us to grow and build a bigger and more solid business. We've outlined five strategic tracks. First, we have redefined our purpose, and with that purpose, we aim to renew the customer experience. Second, we aim to win online and be the undisputed market leader online in our category.
Third, we will reinvest in the stores to renew the store concept and adapt our store network to a more digital age. Fourth, we will look for new growth areas not far from our existing business, but within something that we know how to do. Fifth, we will do significant changes to how we work internally, and in part to free up costs to be able to finance our growth initiatives. We will measure the success of our strategy on three parameters. One, whether we lift customer satisfaction or customer engagement. Second, whether we are able to grow revenues. Third, whether we're able to secure earnings at the absolute level that we are at now. Let's have a look at the initiatives within each of the five strategic tracks, and please turn to slide 12.
This is about purpose, and while it's a pretty soft slide, there's pretty hard data behind it, and it is actually quite hard business. Our purpose, which is to deliver beauty and wellbeing for life, actually tells you something. First, we want to stick to our knitting. We want to be a specialist. We want to lead in our particular category. Second, our business is all about a lifelong relationship with the customer. It is not about single transactions in a brick-and-mortar store. We have started not to think of ourselves as a conventional retailer, but more as a trusted beauty and wellbeing brand that should always change and pace with the consumers where she wants to shop and how she wants to shop. We've set up six guideposts for the future customer experience.
First, we want to be more personal, and behind that lies an intention and a lot of actions to use the customer data, of which we have plenty, and the customer relationship that's quite deep to deliver a more targeted experience. Second, we want to upgrade our stores to use the strength of the physical store compared to shopping online. We think our category is particularly well-suited for the store experience as you need to try and smell and touch the product. Third, we do see growth and differentiation in the green area, the natural beauty area. There's a big green wave running all over the consumer, and we want to ride that wave and make it even bigger. Fourth, we think that we should make it easier and easier and more simple to shop. We can use technology to make shopping easier and faster for the consumer.
Fifth, we do think that being Danish is something that we can leverage even more. We have a very distinct heritage, and we have a strong tradition in Denmark for design, for quality, and for purity that we think we should strengthen even more. Finally, this may sound as a given, but we should strive always to be relevant to everyone. This is what makes Matas special, that you can shop in Matas throughout life. We are dead set on always having a selection in stores that matches the consumer needs at every stage of her life, and having price points that make sure that we are relevant to everyone and do not become over premium, over exclusive. Just a few words on how we work with these guideposts.
We actually use them to drive development in our assortment and in our market communications, and in our operations overall. A few months ago, these guideposts were just words and plans, but all our teams are busy at turning them into action, and we have a quite strong pipeline of initiatives to make them come alive and meet the consumer. Please turn to Slide 13. Our ambition is to win online. We are adamant and unwavering about this ambition. We want to be number one in our field online as quickly as possible. As I mentioned, I'm pleased to report that we are making good progress in that area. Over the last 6 months, we have built a new management team, and the management team has in turn built their team, and we have incentivized the whole organization to support our efforts to win online.
A few examples, we have launched next-day delivery across the country. If you order today, we guarantee delivery next day. Just recently, we launched same-day delivery in the Copenhagen area, and we have seen really good response to those initiatives. We also aim to use our brand and our assets to create more differentiation. A couple of months back, we did a small test to bring our stores on Facebook and communicate with customers on Facebook. Now I think we have the biggest social media team in Danish retail because 244 stores now have Facebook pages, and the customers love it. Even more importantly, our employees actually really enjoy being able to connect with customers in that way. For us as businessmen, we can see that it actually drives traffic to the stores. We've launched a new online community for young beauty lovers called Beam.
It's off to a good start, but it's very new, so too soon to comment. We recruited a new head of social media, which should indicate to you that we are very serious about our efforts to gravitate our marketing efforts from more conventional channels to the online channel and build a strong presence in social, because that is very important to our customers. Just as one example of working with the brands, we have launched a Chanel brand store after more than one year of preparation, which is an example of how we want to build the presence of strong brands that we can sell. We have also made good progress in terms of technology partnerships. We are aware that we are competing with some of the biggest companies in the world online, or will be eventually.
Our ability to enter into partnerships with good technology players is really key. That means that we have been able to do real-time personalization online better, that we are better at integrating social media content into our site, making it easier to search as well for the product, and making load speeds online even faster. In online, it's fair to say that I think we operate at a higher clock speed than ever before, and we are happy to see that the efforts are actually paying off. I would also say that we are mindful that we have a very long road ahead of us. Please turn to Slide 14. As for the stores, as part of our strategy work, we did an extensive analysis, and we evaluated our entire store network and set out a plan to upgrade and adapt the stores.
We hear a lot of skepticism around physical stores. We want to be clear that we believe that investing in stores will create long-term shareholder value. We believe that renewed stores with the right concept on the right location can not only be profitable but can also sustain growth and at the same time reinforce our online position. We've looked at the white spots. We won't be opening a lot of new stores, but we think there are room for a few new stores in attractive locations. We've seen 10 to 20 places around the country where we can expand the stores, make them more attractive. 10 to 20 places where we can consolidate stores. If we have two small stores, bring them into one bigger store with a better offer.
We've been very clear that we do not keep stores alive just for the purpose of keeping them alive or generating into revenue. We have a clear requirement of our stores that they should perform, and if we can see that they can't perform over time, we will be very swift at closing stores. This particular item, we are still in the development phase. If you please turn to Slide 15. We are developing new store concepts with interesting new additions to the range and to how we present the merchandise and how we service the customer. We have included all the lessons that we've learned from the existing concept, but we have also dialed up our innovation ambition, and we are right now in the development phase.
We expect the first stores to be ready no later than the end of this financial year. We'll get back to you as soon as we have news on that area. Please turn to slide 16. We've said that we want to open new growth paths. We have outlined a number of areas internally where we see possibilities to grow. The first initiative is Matas Natur, which is all about tapping into the green market. We see the green market as we define it as an attractive, rather unconsolidated market with a value of more than DKK 1.6 billion. We see it growing above and beyond the overall market. We see an opportunity for Matas to play a bigger role in that market.
We have plans to launch that initiative within the next quarter, strengthening our offering in our existing Matas stores, strengthening our offer on matas.dk, our online store, and opening two concept stores, one in Copenhagen and one in Aarhus. We will get back to you with how that is going when we talk next time. Please turn to slide 17. Finally, we're changing how we work. This is not something that's visible to the eye. Internally in Matas, we're changing quite a lot to become an even more modern company. This is all about driving the cost of operating the business that we have known historically and freeing up resources to grow and chase the new businesses that we are looking into.
We're looking at four areas: our commercial excellence, how we price and how we set the assortment; our sales excellence, which is how we meet the consumer in the stores; customer insights, where we recruited a new head of customer insights and Club Matas; and finally, our technology stack, which should enable us to drive down operating costs over time. I think the most important development that I would like to highlight to drive this transformation is that we now have the full management team in place as of June. Please turn to slide 18. This is the new structure for our management team. We have brought on a new head of commercial, Lise Ryevad, who has eight years of experience from Copenhagen Airport within a number of the categories that we operate in, and before that, from L'Oréal.
Our former sales director has taken on the challenge of spearheading the renewal of our stores, which makes sure that whatever concept work we do is actually rooted in concrete experiences with operating the stores. We have brought on board Søren Thomsen, who has had a very successful run as sales director of [Vong & Møller] which is an underwear and high service concept. We've also announced that our technology and very capable technology director will succeed our HR director and take on a double role as head of technology and organization, which has everything to do with the fact that we should be very tech-savvy in retail and all of our people need to be very tech-savvy. Please turn to slide 19. Let's have a short look at our financial targets for 2018 and 2019.
As you all know, the targets are unchanged. We reiterate the guidance that we gave at the beginning of the year. An unchanged level for underlying revenue, like-for-like between -1% and +1%, an EBITDA margin above 14.5%, and finally, a CapEx level between DKK 110 million and DKK 130 million. We've started the year a bit ahead of our revenue and EBITDA guidance. We're pleased that this is the case. It's too soon to change the guidance for the year. We would like to see if this is a momentum that can be sustained before adapting or changing any guidance. You should note that we do not foresee a worsening of market condition in the remaining part of the year. We have no indications that we should see more than gradual increase in competition.
However, we are quite sure that the sun is not going to keep shining on us for the rest of the quarters. Please turn to slide 20. With this, we have completed the presentation. We're ready to take your questions. I will hand over to you, operator.
Thank you. If you wish to ask a question at this time, please press star one on your telephone keypad. Please ensure your mute function is switched off to allow your signal to reach our equipment. Again, please press star one to ask a question. We will now take our first question from Claus Almer from Nordea. Please go ahead.
Thank you. Yeah, a few questions from my side. I will take them one by one. First of all, congratulations with the strong performance in your online store. Could you please put some color on the average basket size? How has that developed within this channel? Also, if possible, quantify to what extent you have seen your online sale taking revenue from your store network. I know that's a difficult question, but based on your member data, it should be possible to sort of quantify the effect. That'll be the first question.
We don't give out the basket size and transactions for online. We think at the size that online has now, we don't think it would be prudent or right to disclose those details. With regard to cannibalization, if you remember on the Capital Markets Day, we showed you a graph that it's really, if you want, you can actually see a positive correlation between online growth in a particular geography and the price and the performance of the local stores. We do have a lot of anecdotal evidence to support that growing online actually also goes hand in hand with growing the stores. I think I've mentioned before that we have more than 50% of pickups of the merchandise is in stores, and when the customer comes into the store, one out of three will actually buy something on top.
We do see an uptick as well in what we call connected retail, so the ability of the stores to order something for the customer in the store that's not in the store and have it delivered to the store. We see that growing as well. I think that's the best I can do, Claus.
Okay, that's fine. Just my second question goes to this strong sale of sun-related products. How much did that actually contribute to the like-for-like growth in Q1?
We're not, again, we won't go into that level of detail. Obviously, as I mentioned on the call beforehand, this was a positive development due to the mass market. This is mass market beauty that it fits into. You could say that we had not had that positive development on the sunscreen products, then our mass market beauty would probably have been in negative territory, that's correct.
Okay, would it be?
Not just a positive.
Sorry?
It's important historically, we've looked back into history to see if sunshine is good for Matas, and it is a double-edged sword. We do see it is a mixed bag because we do see less footfall, less retail traffic overall, and we get hurt by that. Of course, we have seen a net positive effect from the sunscreen sales.
If you were to remove your calendar effect of this half percentage point and your growth in the sun-related products, would you still then be in the positives?
Nice try.
Nice try, yeah.
Okay, just my.
We have very positive sales development, for instance, in the vital area, and with all due respect, that didn't have a lot to do with the good summer.
Okay, just my final question.
Both vital and high-end.
Will the sun's related products also have a positive impact in your second quarter?
We will discuss our second quarter when we report our second quarter.
Okay, thanks.
We will now take our next question from Mikkel Rasmussen from ABG. Please go ahead.
Thank you so much. I would also like to ask three questions. First of all, in terms of the number of transactions, well done on this one here, but what is the number when you exclude the online part of the business there, please? Secondly, you mentioned that you have seen increased competition both in online and offline. Obviously, this is back in time. Now, I do remember you at one stage said that when Normal would stop opening stores, and if they had negative like-for-likes in the stores you had opened, then you would see competition go down from these guys. So are you seeing competition in physical stores from anyone else than Normal right now, i.e., are you, for example, seeing the supermarkets intensifying or anything on that side?
On the online side, are you then seeing any impacts from Boozt's recent launch of their beauty segment in Denmark? That was my second question. My third question is on the staff. The number of staff is down by 2% year-on-year. Can you talk about where exactly you are reducing the number of employees, and can you continue to take out more employees? Thank you.
In terms of transactions, we don't break down the numbers between the channels, but I can say that transactions in-store have been up as well. In terms of competition, we have seen that Normal is continuing to open stores at a lot lower pace, but they are opening stores, and they are moving stores to bigger rooms or bigger locales. We have also, as you mentioned, seen that supermarkets have generally been more aggressive on offers and prices on the mass beauty part. As for Boozt, we cannot detect anything at this point. With regards to staff, it's primarily staff in stores, so effective being able to run the stores more effectively. I have said before that we have ambitions to bring down costs over the coming years using technology, but I can't specifically comment on how much and how fast.
Okay. In terms of MAC, I do understand that Boozt is also launching MAC in the program. Is it rightly remembered that you used to have the exclusive on MAC cosmetics in Denmark?
No. The story about MAC is that traditionally MAC was only in the big department stores, so they would only sell through Magasin, Salling, Illum. They went outside of that, and they went with us, particularly on the physical stores. We never had an exclusive right for MAC in Denmark.
Okay, great. Thank you so much for clarifying that on us.
Exclusive right.
Yeah.
As a reminder, to ask a question, please press star one. We will now take our next question from Poul Jessen from Danske Bank. Please go ahead.
Yes, thank you. Just two questions. One is coming back to the sun impact or sun blocker impact. I think I can remember that a year ago you had a very poor Q1 or underperformed Q1 because of a very poor weather last year, and that, as I remember, should have had a negative impact of about DKK 10 million. Is that the reverse we see this year? That's the one. The second is that you talked about you've got suppliers supporting your gross margin. Is that something lasting or should we see improved or even further support there going forward? Thank you.
Let's start out with, as Gregers has mentioned, it is a double-edged sword. Yes, there are definitely some positives coming from the good weather, specifically on the sunscreen sales. You are also right in saying that the weather was actually abysmal last spring, and it was much better this spring. There is some positives there. As we said, it's not just all good news because there are some negatives on it as well. I'm not going to comment and say it's X million one way or the other.
Okay, then the gross margin.
There are a lot of other moving parts for the quarter, including competition being tightened. As for the suppliers, I think it would be wrong to comment, and I think we should let the results speak for that. We're happy to see that the discussions that we initiated actually very early in the year about gaining supplier support for both our short-term and longer-term strategy has paid off. This is obviously something, and I think I've mentioned this before, we do see that suppliers, they have a strategic interest in seeing Matas succeed, because they would rather sell their product in a branded environment together with some of the biggest and most interesting brands and in a highly serviced environment. There is a quite strong alignment with suppliers in that regard.
I think they don't want to see a channel structure in which their goods are sold in a less favorable environment and solely price-driven environment. We have a strong and good and continuing dialogue with the suppliers. Lise coming in as commercial director has a very long track record both from the supplier side and recently dealing with suppliers that we look to benefit from.
Okay, thank you.
As a reminder, to ask a question, please press star one. We'll pause for a moment to allow everyone to signal. As there are no further questions in the queue at this time, I would like to turn the call back for any additional or closing remarks.
Okay. We will say thank you for your questions and your time today, and if there are any wish to follow up, we'll be on the phone for the rest of the day, and then we'll see most of you tomorrow. Have a wonderful day.
Thanks for joining.
Thanks for joining.
Bye.
Thank you. That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.