Good day and welcome to the Q2 Report 2017 conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Anders Skole-Sørensen . Please go ahead, sir.
Thank you. Good morning, everyone. Welcome to our presentation covering the first quarter of the 2017/18 financial year. I am Anders Skole-Sørensen and today I have with me the chairman of the board, Lars Frederiksen, in addition to our new head of IR and strategy, Elisabeth Stockmann Klintholm. Before we move to our presentation of the results for the quarter, I'd like to hand over to Lars Frederiksen for a comment on the appointment of the new CEO, which we made earlier today. After Lars' remarks, I will take you through the presentation of our Q1 numbers. We will end with our usual Q&A session, where you today will also have the opportunity to direct questions to the chairman of the board.
Thank you very much, Anders. Today we have announced that the board of directors of Matas has appointed Gregers Wedell-Wedellsborg as new CEO from November 1st, 2017. Gregers will succeed Terje List, who will leave Matas at the end of October after serving as CEO for more than 17 years. Terje has led Matas under three different ownership structures. From the start, Terje helped professionalize Matas, as it was then a voluntary chain with many owners. Later, he played a vital role in the transformation of Matas into a capital chain under private equity ownership. Finally, he has led Matas through an IPO in 2013 and through four years as a publicly traded company. Terje has been instrumental in positioning Matas as a leading beauty and health retail chain on the Danish market.
He leaves a strong Matas, which holds the largest loyalty scheme among Danish customers, strong financial key figures, motivated and dedicated employees, and a strong and visible value proposition for the customers. I'd like to take this opportunity to thank Terje for his 17 years of deeply dedicated service to Matas. The board of directors has found that the time has come for a new perspective on Matas and on how to take the company to the next level. With the appointment of Gregers Wedell-Wedellsborg as new CEO, Matas will get a leader who is an experienced retailer with extensive experience in the digital universe, including e-commerce, customer clubs, and loyalty programs.
In addition, Gregers has a strong management background, most recently as Group Executive Vice President at Coop Danmark, where since 2015, he has been in charge of Coop's four supermarket chains with a total turnover of more than DKK 30 billion and 30,000 employees. On behalf of the board, I would like to take this opportunity to reiterate that our 2020 strategy, The Ultimate Difference, remains intact. This strategy revolves around two main elements, customer focus and digitalization, with the aim to proactively meet customers' needs and provide the best shopping experience across sales and communication channels. The board of directors are confident that Gregers is a perfect match to ensure a strong and efficient implementation of the 2020 strategy and that he will be able to take Matas to the next level. Those were my words regarding the management changes.
Anders, would you please take us through the numbers?
Thank you, Lars. Let me begin by giving you some headlines on the financials, the business development, and other topics we intend to cover today. Please turn to slide number three. The Q1 2017/18 numbers were relatively weak from a top-line perspective with a drop in underlying sales of 2.9%, primarily due to the loss of three trading days in the quarter, in addition to weak sales of seasonal products and a general reduction in customer traffic. Gross margin was 1.1 percentage points lower than in the same quarter of last year. Total costs declined DKK 5.9 million in the quarter, but rose as a percentage of sales due to the fall in revenue. Please turn to slide number four. I will talk more about strategy later in the presentation, but let me briefly give you a status on a couple of our strategic initiatives.
We've continued our remodeling program for the top stores and opened two fully refurbished stores in the first quarter, one in Hillerød and one in Kolding. There are openings planned in the coming quarters, not least our new flagship store in Rødovre Centrum, which will open at the end of September. We continue to develop and expand our loyalty scheme, Club Matas, which now have more than 1.7 million members. One example is our newest collaboration with travel agent Apollo, where we offered customers the option of doing their tax-free shopping at Matas before going abroad. As to the store network, we took over two of the remaining associated stores and are on course to acquire another couple of smaller stores in the coming quarters.
When these stores have been acquired, the group of remaining associated stores is reduced to a total of six stores, five of which will leave Matas at latest by the end of January 2018. At that time, the only associated store remaining will be the store in Grimhøj, which does not participate in our marketing and in Club Matas, but only purchases its products from us and thus can be handled differently. Please turn to slide five. As mentioned, the first quarter of the financial year 2017/18 was weak from a top-line perspective. The lower sales reduced gross profit to DKK 379 million in Q1 compared to DKK 401 million in Q1 of last year, as our gross margin was 1.1 percentage points lower this year. Our EBITA margin fell to 14.5%, which is 1.6 percentage points lower than the same quarter last year, where it stood at 16.1%.
EBITDA for the quarter was DKK 119 million, while adjusted net profit came in at DKK 89 million. Cash flow from operating activities was DKK 69 million in the quarter, a drop of DKK 8 million compared to Q1 of last year. Please turn to slide six. As already mentioned, underlying sales were 2.9% lower in Q1 and total sales were 3.2% lower. Behind this drop is a number of moving parts. On the positive side, we saw an increase in the average basket size in the quarter, while the number of transactions were down. Sales in the quarter were negatively affected by Easter, which fell in April and meant the loss of three trading days. When we look at our segments, sales in our beauty segment showed growth in Q1, with especially high-end beauty growing 6%.
High-end beauty sales were supported by a trend towards moving upmarket for some customers, particularly within skincare, but also by the strong performance of some of the new brands we have introduced, in particular MAC. This was negatively mirrored by a fall in the sale of mass-market beauty products, where sales were also affected by the higher number of competing stores when compared to Q1 of last year. As you may recall, one of our competitors went through a very rapid build-up of new stores in the first half of 2016. The Vital business, which focuses on dietary supplements, did not put in a stronger performance, with sales declining 3.9%. This result was in part caused by the loss of trading days, but also by somewhat less effective campaign offers in that area.
In the Material business, Q1 sales fell 11% due to increased competition and disappointing sales of some seasonal color. Please turn to slide seven. The gross margin fell from 47.3% in Q1 of last year to 46.1% in the first quarter of this year. The drop in sales resulted in a DKK 22 million fall in the gross profit to DKK 379 million. Our gross margin may fluctuate from quarter to quarter depending on the competitive situation, on the exact timing and effect of products and campaign, and on several other factors such as swings in the sale of seasonal products. This quarter, we saw an increase in competitive pressure and both more as well as sharper campaign offers. The result was an increase in the proportion of sales on campaign and a lower gross margin.
Generally, we concern ourselves mostly with the last 12 months trailing gross margin. Here we've seen only a very marginal decline from 46.5% at the end of the last financial year to 46.3% at the end of Q1, confirming what we believe is an overall stability of our gross margin. With that, please turn to slide eight. Our EBITDA margin of 14.5% was, as mentioned, down by 1.6% when compared to the same quarter last year. EBITDA for the first quarter was DKK 119 million, down from DKK 137 million in the first quarter of last year. The drop in EBITDA margin was primarily caused by the reduction in gross margin, but staff costs also rose as a percentage of sales in Q1 compared to the same quarter last year.
Staff costs increased marginally from DKK 171 million to DKK 173 million year-over-year, or to 21.0% of sales in the first quarter of this year, up from 20.2% of sales in the same quarter last year. The increase was mainly driven by higher staff costs at the headquarter as a result of an investment in staff in connection with the implementation of our new strategy. The drop in EBITDA margin was mitigated by a fall in other external costs, primarily lower marketing costs, as Q1 last year was characterized by extraordinarily high marketing costs in connection with the introduction of the Stripes add-on to Club Matas. Please turn to slide nine. Our net financial costs fell by DKK 4.5 million to DKK 5 million in the first quarter from DKK 9.5 million in the same quarter last year.
This does not include the mark to market of the interest rate swap we have in place. The effective tax rate was 22% in the quarter and unchanged from the same quarter last year. The profit for the period was DKK 74 million compared to DKK 85 million in Q1 of last year. Adjusted profit after tax for the quarter was DKK 89 million, down DKK 10 million from the first quarter of last year. Please turn to slide 10. Inventories increased by DKK 62 million in the quarter due to normal seasonal inventory buildup before the summer season. Inventories stood at 22% of last 12 months' sales at the end of the quarter. Please turn to slide 11. In the first quarter, we saw a cash outflow of DKK 60 million driven by changes in working capital.
The outflow was marginally lower than the DKK 67 million we saw in the first quarter of last year, as the improvement from a smaller buildup of inventories was counterbalanced by less growth in trade payable. Please turn to slide 12. Cash flow from operating activities in the first quarter stood at DKK 69 million, down from DKK 77 million in the first quarter of last year. With lower overall CapEx in the quarter, free cash flow rose to DKK 33 million from DKK 26 million in the same quarter last year. Cash flow from financing activities were much higher than in the same quarter last year due to the timing of the financing of part of the dividend payment, which was paid out just after the end of the quarter. Please go to slide 13.
Gross debt stood at DKK 1.7 billion as of June 30th this year, thus within our target range for the gross debt of DKK 1.6 billion-DKK 1.8 billion. Net interest-bearing debt stood at 2.45 times last 12 months EBITDA, compared to 2.2 times at the end of June last year. We still intend to pay out at least 60% of adjusted net profit as a dividend to our shareholders and to distribute excess cash through share buyback. I know that some of you may have questions about the size and timing of the new share buyback program, given that there is no board decision yet on this issue, unfortunately, we cannot communicate more specific data at this time. Now let's have a look at our strategic priorities and what we specifically are working on at the moment.
Please turn to slide number 14. Let me start by repeating what was already mentioned, i.e., that the management changes announced by the board of directors earlier today has no implications on our strategic direction. We continue to pursue customer centricity and digitalization by working on our five selected focus areas shown on this slide. On the following slide, I will elaborate a little bit further on our strategic focus areas. Now please turn to slide 15. As I'm sure you are aware of, meeting the customer is a key part of our customer centricity effort. The interaction between our customers and our store employees is the single most important element in the way Matas operates. It is imperative that our customers feel welcomed in our stores and are offered friendly, informed service.
This is exactly why we, during the last five quarters, have focused on further improving the customer meeting in a number of ways, including a strengthened sales organization, a new head of sales, increased staff training focused on service and sales performance, and a mystery shopping program. Our category management project is still fairly new, but it is already showing a lot of potential in helping us becoming even more relevant for our customers. Changes already implemented include an increased focus on the Vital area and the introduction of talk-of-the-town makeup brands like, for instance, NYX. During the spring of 2017, we introduced a new private brand with spa and skincare products, and we relaunched the Stripes in connection with the celebration of their 50th year birthday. Now please turn to slide 16.
We continue our hard work to ensure that Matas offers a truly world-class store experience while striking the right balance between being new and modern and at the same time remaining recognizable for our many loyal customers. During the last five quarters, we have welcomed customers into 11 brand new or completely refurbished stores. With each store opening, we continue to improve the look and feel of the store and to leverage our experiences from previous store openings. Our next store opening is planned for the end of September in Rødovre. With its almost 750 sq m, it will be even larger than our store in Sønderborg, which was our first store to include a shop-in-shop pharmacy. The shop in Rødovre will include three shop-in-shops, a MAC, a NYX, and a StyleBox.
In addition to our refurbishment, we have carried out minor updates and facelifts across the store portfolio, reaching a total of more than 100 stores during the last five quarters. Now please turn to slide 17. Staying relevant to our customers also means staying competitive on pricing in a market with intensified price competition, and in particular, making sure that we communicate our price position effectively. By using our concepts, Altid, with the meaning always low prices, and fordi, with the meaning because price also matters, we've increased the emphasis on our ability to remain relevant to the price-sensitive customer segment. On that note, I would like to remind you that we expect the headwinds from Normal's store openings to persist until the end of this calendar year.
We note, however, that stabilization is likely to set in from the middle of our Q3 and onwards, as Normal has only opened six stores since November 2016 with, as far as we know, another two store openings planned during the autumn. Now please turn to slide 18. As part of retaining our position as the number one player in health and beauty, we actively embrace digitalization as part of our old strategy. Our goal is to enable seamless customer interaction across our many platforms. In order to achieve this, we've been working hard to improve the look and feel of our web platform, and at the same time, we've been busy behind the scenes improving the way we use our Club Matas customer data. In the beginning of the first quarter of this year, we launched two new initiatives, Stories and Club Mama.
Stories is an online customer universe with tips, tutorials, and inspirational articles while Club Mama is a new customer club within Club Matas for expecting mothers and mothers with small children. The customer response has been very positive with good traffic, and the initiatives have also been generating leads into the workshop. Later in the year, we will launch our new POS sales systems in the stores in order to optimize campaigns and to ensure that customers are always offered the correct discount. On this note, please turn to slide 19, where I will talk a little bit more about our Club Matas system. As I already mentioned, Club Matas counts for more than 1.7 million members, and we consider Club Matas to be one of our most valued assets.
In connection with the launch of the new reward system with Stripes in the first quarter of 2016-17, we carried out a major overhaul of our Club Matas app, and we now have more than 500,000 Club Matas members who actively engage with us through the app. Meanwhile, we've also been working with our partners in the Club Matas partner program, and during Q1, we welcomed two new partners, bringing the total to 23. One example of a collaboration is the tax-free offering with travel agent Apollo we launched before summer. We offered Club Matas members the option of doing their tax-free shopping in Matas before their trip, and many customers have taken advantage of this opportunity. Now please turn to slide number 20. Looking forward, we reiterate our guidance for the fiscal year 2017-18. Our guidance is unchanged and underlying like-for-like revenue growth of between 1% and 3%.
We also still expect to be able to increase our EBITA in 2017-18. Finally, we still expect CapEx to fall within the range of between DKK 90 million to DKK 100 million, naturally excluding any acquisitions. Please bear in mind that there is a negative effect from a decrease in the number of trading days this year, all of which have not been accounted for in the first quarter. For your benefit, we've included a slide with the development of the number of trading days at the end of the presentation. Now please go to slide 21. With that, we are now ready to take your questions. Over to you, operator.
Thank you. If you would like to ask a question at this time, please press the star key, followed by the digit 1 on your telephone. Please ensure that your mute function is switched off to allow your signal to reach our equipment. Again, that's star 1 if you would like to ask a question over the audio. We'll pause for a brief moment to allow everyone signal. We can now take our first question from Poul Jessen from Danske Bank. Please go ahead. Your line is up.
Hi there, thanks. Start with a question for Lars Frederiksen about change in CEO. You said that you were satisfied with strategy. You wanted to continue the strategy as set out for 2020. My question is, where do you then see the deviations, or what are the reasons triggering the change in the CEO? That's the first question. Second question, I guess I can also ask to you is about the cash returns. Anders just repeated the policy, but my question is, do you expect or see that there will be more investments now that you are changing for instance, by refurbishing more stores, which could then reduce the excess cash that could be distributed on share buybacks? Any comments on that, please? Thank you.
Thank you, Poul. This is Lars. Thank you for the question. First of all, concerning the strategy, it is true and correct that we are very happy with the strategy that we are pursuing, The Ultimate Difference, the 2020 plan. We don't foresee any changes in that strategy as it was explained by Anders. The difference that we see is in the execution of the strategy, where we definitely expect a faster and more direct execution of the strategy. In terms of the cash returns, we still expect to return excess cash to our shareholders. In terms of investments, we believe that the investments will stay within the guidelines that we have already issued, both for investments in upgrading of stores and also purchase of associated stores, which obviously is going to be significantly less since there are hardly any more stores to acquire.
The strategy remains the same in terms of returning excess capital to the shareholders. We don't foresee any major change in terms of the return of cash compared to what we have previously said.
Okay, thanks. Just to follow up, you said execution faster and more direct. Can you be a little more specific on what's meant by that?
Well, this goes notably for the digital part and the omnichannel part. I believe that in terms of the physical stores, we are pursuing the upgrade of the stores with a very nice speed, which is well-balanced between investments and execution. We believe that we have a very strong asset in our digital platform in the Club Matas, and we would like to see this basically broadened out and used in a much more aggressive manner compared to what we have been witnessing so far.
Okay. I will leave the floor to others, then I can come back more on operations. Thank you.
Thanks.
Thank you. We can now take our next question from Claus Almer from Nordea. Please go ahead.
Thank you. I have also a few questions. This goes to Anders. In the report, it is mentioned that the online sale is only slightly up. I guess that is significantly less than we have seen in the past quarters. Can you give some comments on that one? That would be the first question.
It is fair to say that the growth in online sales has been lower in Q1 than we have seen in previous quarters. We think basically the effect of the loss of trading days was perhaps somewhat bigger than we had perhaps anticipated beforehand. It turns out that in Easter, people just don't buy anything online either. We see this as a blip more than anything else.
Online is open twenty-four/seven, so it doesn't matter whether you have Easter or not. You could see-
Yeah.
during the Easter days.
People just don't actually pay in Easter. That is not something that only goes for us. We've talked to other online, and it turns out to be a common issue.
You strip out those days, your online sale was up 20%, 30%, as we've seen in past quarters?
I haven't got precise numbers, it was definitely better than if we don't strip them out.
You would be sure that you do not lose market shares online?
Well, yes. That is definitely what we're seeing. We don't think we are losing market shares. As you know, it's very difficult to calculate market shares on market size.
Sure. The second question goes to also, of course, the first quarter. Have you seen any campaigns failing, or has that been as it should be?
As I said, on the Vital area, there were a few campaigns that didn't quite pan out as well as we would've liked them. Otherwise, it hasn't been a quarter with any sort of unusual activity or unusual successes or fiascos on the campaign side.
Do you plan any new larger campaigns for the second quarter so we could reverse the currently negative trends?
No, we believe that when we look at what we have in the pipeline with regards to marketing and with regards to campaigns going forward, we're quite satisfied, and we don't think we need a step change in that.
That also goes for the marketing spent?
Yeah.
Okay, thanks.
Thank you. We can now take our next question from Frans Høyer from Danske Bank. Please go ahead.
Thank you. I understand the 2020 strategy is intact. What about the sales target in that strategy? Is that also intact? Could you reiterate that? Also, on what's happening in the online space, what have you seen from? Are there any new competitors out there that are making themselves felt, as far as you're concerned? Thirdly, a question on the gross margin pressure, and also the sales trends in the low end. If we divide the low end into Stripes and external brands, what are you seeing in terms of sales growth then? Have you had to adjust prices for the Stripes product, for which you probably don't get any compensation from your supplier? Yeah, that's it.
Okay. Well, of course, when we say we reiterate our strategy, that means that we reiterate the whole package, not just parts of it. At this point in time, yeah, that also includes the sales target, obviously.
Of course.
With regards to online and new competitors, we've definitely noticed that Boozt has opened up for sale of high-end cosmetics. They opened a physical store back in, I think it was March or April. Somehow, the world didn't see that until after summer, but that's their question. The effect at this point in time, it's still way too early. They weren't really active in our Q1, it's too early to say.
Okay.
With regard to the gross margin, yes, we don't give out specific data on our own products vis-a-vis our products from other suppliers. It is true that we have been changing some of the recommended or the normal price for some of the striped products, taking into consideration what's been happening around us. However, it should be noted that even historically, most of these products were sold on campaign rather than at these recommended or normal list prices. The effect is less than if you just take the headline reduction in the official list prices.
Is that the reason for the gross margin decline?
No. The reason for the gross margin decline is primarily that we have had an increase generally in the share of sales on campaign.
Okay
Therefore, we have seen some minor pressure on gross margin.
I suppose your increased sales of high-end products will be associated with higher gross margins.
I think we said.
That's my guess.
I think we reiterated a number of times that the differences in gross margin between high-end and mass market beauty is actually much smaller than you think.
It is there.
Depending on what types. I can definitely find products within mass market beauty where we have a much higher margin, for instance, our private brand, I can also find products with a lower margin. It's a mixed picture.
Okay. Thanks very much.
Thank you. We can now take a follow-up question from Poul Jessen from Danske Bank.
It's a question about the guidance, which you reiterate here. I can also see from the wire that there will be a severance payment for Terje List. Is that then including that one, or could we potentially see that that's been taken out later on, if you see the world as it is today?
Guidance is made based on what the world looked like at that given time. If there are some extraordinary costs associated with the change in management, of course, that's not included in the guidance.
Okay. About the store traffic of minus 9%, and then you have higher ASPs. In general, the store traffic, is that led by you simply losing out in the mass market?
No, the way that we see it honestly is that when we look at the general traffic numbers we get from the centers and what else data we have, we are suffering from a general trend in the retail market. We're also hearing this from other retailers. The traffic issue is a general issue. It's not a specific Matas issue.
Okay, and then a final one. I might have missed out on that, but if I look at the comparison to the numbers for beauty, Vital, and Material from last year, then it seems as if you made a restatement between the-
Yeah, that's correct. We will be giving you data. There have been a few changes in our internal way of looking at some of these products that moved around between the categories, and we will be giving you historical data so that you won't get these sort of strange jumps.
Okay, thank you.
We can now take a follow-up question from Frans Høyer from Danske Bank. Please go ahead.
Yeah. Sorry. Yeah, hello. Just a question on that store opening at Rødovre Centrum.
Yeah.
The partner that I'm not sure, could you just update me on your franchisee in that part of the world, please?
Yeah. As you know, we have until now, at this point in time, if you go to Rødovre Centrum, there is a big Matas store there, which is run by one of our associated stores. We are now opening a Matas store on the 28th, 29th of September. There will be a while between that date and the end of January where there will be two stores in Rødovre Centrum with Matas on the door. From the end of January onwards, the associated store will have to change their name and operate under a different heading or a different banner.
Okay. That situation is now firm? There is no negotiation or anything going on?
No, that situation is definitely gone.
Okay, thanks.
Again, as a final reminder, that's star one if you would like to ask a question. As we have no further questions in the queue at this time, gentlemen, I'd like to turn the call back over to you for any additional or closing remarks.
All right. Thank you very much. There are no more questions, we will end the call. Thank you very much for participating. As you know, you can always contact either myself or Elisabeth Stockmann Klintholm , sorry, if you have any further questions.
Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.