Matas A/S

CSE:MATAS

Earnings Call Analysis

Strong Quarter and Upgraded Guidance

The company experienced substantial growth at the start of the financial year, with an uplift in revenue to DKK 1.150 billion, representing a 9.2% increase, and earnings improving by nearly DKK 10 million to DKK 201 million. Notably, revenue growth is driven by an increase in customer transactions, both from existing and new customers. E-commerce growth was particularly impressive at 26%. Consequently, the revenue growth guidance for the year has been revised from 3-6% to 4-7%, while maintaining the EBITDA margin guidance of around 17%. The quarter saw robust inventory levels to sustain delivery performance, especially online, and a gearing range post-Kicks acquisition expected between 2.8x-3x, aligning with long-term guidance.

Strong Commercial and Strategic Position Mark New Chapter

The company has entered a new chapter on a high note with robust commercial and strategic positioning. Revenue saw an uplift to DKK 1.150 billion, signaling a 9.2% growth, while EBITDA increased by nearly DKK 10 million, reaching DKK 201 million, and achieving a margin of 17.5% that aligns with the company's year-end guidance.

Raised Financial Expectations and Steady Investment

Buoyed by strong performance, the company raised its revenue growth forecast from 3-6% to 4-7% for the year, maintaining the EBITDA margin guidance before special items at around 17%. The focus remains on investing in the Evolving Matas Group while expanding the product assortment. A significant capital expenditure is earmarked for the year, ranging between DKK 425 million to DKK 450 million, exclusive of the Kicks acquisition.

E-commerce Booms and Assortment Expands

E-commerce reported a staggering growth of 26% in the first quarter, fueled by both core offerings and new product expansions. This sector's success outpaces the general market, reflecting strong performance and strategic moves towards online retailing and assortment enhancement.

Strategic Acquisition in Sight

The company is poised to acquire its closest peer, Kicks, a prominent player in the Nordic beauty market, with expectations to finalize the purchase by the end of August. The deal, valued at an equity purchase price of DKK 700 million with an EV/EBITDA multiple of 4.7x, aims to achieve synergies yielding an EBITDA effect of DKK 140 million. This acquisition is primarily debt-financed and is set to create a Nordic market leader, projecting heightened synergy benefits from the consolidation.

Preparation for a United Future

Post-acquisition, the company will thoroughly acquaint itself with Kicks' operations. A Capital Markets Day is planned to unveil the strategy for the combined entity. This approach underscores the company's commitment to strategically align and integrate the two companies for optimal performance and growth.

Continued Progress Across Strategic Tracks

The Matas Group strategy, which is about two years into its implementation, has been successfully advancing in six key tracks. Noteworthy developments include Nilens Jord, a makeup brand, gaining ground in the German market and the build-out of the Matas Logistics Center. These moves support long-term strategic goals, including international market penetration and logistics efficiency, with a special emphasis on social aspects within its ESG agenda.

Earnings Call Transcript 2024-Q1

[Operator]

Welcome to the Matas Q1 Report for 2023. [Operator Instructions] This call is being recorded.

I'll now hand it over to the speakers. Please begin.

[Gregers Wedell-Wedellsborg, executive]

Thank you very much, operator, and welcome all to the call covering the first quarter of our financial year.

I am joined by our CFO, Per Madsen. And this, of course, is a special quarter for us because it is the last quarter as a purely Danish company, the last quarter before we enter a new era for Matas looking into the closing of the acquisition of Kicks Group.

So if you please turn to the next slide, covering the agenda. I will give some comments just high level on the quarter and especially on what the quarter tells you about our strategic progress, then I will give you a very brief update and refresher of our acquisition of Kicks Group as we move towards closing. And then I will hand over to Per to cover the financial results in more detail. And then we will open up for questions.

So if you turn to the next slide, please. This is last quarter as a Danish company. So a good testament to the health and the momentum of Matas as a business. And if you turn to the next slide with the numbers, we have seen a very strong beginning of the financial year. So we are entering our new chapter in really strong form, both commercially and strategically.

The numbers, almost DKK 100 million uplift to DKK 1.150 billion in revenues. Earnings improved by nearly DKK 10 million to DKK 201 million. That's a revenue growth of 9.2%, and a EBITDA margin of 17.5%, very well in line with our guidance for the year.

I think the most significant number perhaps is apart from the growth is that growth is driven by transactions. So this is really more customers shopping with Matas and the customers who we already have are shopping more frequently with Matas. And we consider that to be a very healthy sign and a very healthy driver of growth, and I will return to what comes back and what lies behind that.

With this performance in the first quarter, we upgraded our financial expectations for the year. So if you turn to the next slide, please. Slide 6. We changed our revenue growth expectations from previously 3% to 6% growth to now 4% to 7% growth for the year.

We maintain our EBITDA margin guidance before special items around 17%, reflecting our intention to invest in fueling the growing Matas Group and continue to invest in expanding the assortment and creating awareness around the assortment.

And finally, it's a big CapEx year for us, and this is excluding the acquisition of Kicks. So a CapEx year of DKK 425 million to DKK 450 million. And the big driver of that is the first phase of our Matas Logistics Center, which we are now in doing the real work, not just the paperwork, but actually starting to do the real work of constructing the Matas Logistics Center.

If you turn to the next slide, Slide 7. I'm happy to report that the growing Matas Group strategy, which is about 2 years old, is really proving its worth across all the 6 tracks that we monitor. I will get back to the first 2, our online growth and our assortment expansion. But just to mention that also in other tracks, we're making progress.

In Germany, we have just received news that we will be listing Nilens Jord our makeup brand in 65 doors in Germany, Nilens Jord being a higher value product than the Stripes and with an attractive margin. So this is definitely a good thing for our journey towards breakeven in our journey at German export business.

Also, we have broken ground on and testing for all kinds of environmental samples that you have to do and starting to remove the soil to prepare for the construction of the Matas Logistics Center. So now it's starting to feel real. And we are according -- exactly according to time line.

And I just want to remind that the facilities that we're building, it is a big facility. It has adequate room to support our long-term assortment expansion journey and we will also be able to serve parts of Sweden, if we find that to be -- and parts of the Nordics as well, if we find that to be a relevance.

And finally, we continue to make progress both on reporting and base lining and preparation for CSRD on ESG issues, and we have a special focus on the social aspects of our ESG agenda.

If you turn to Slide #8. This is really the core of our growth strategy. We're not relying too much these days or these years on getting a lot of market growth, but our growth -- key growth driver is to expand the assortment that's available on matas.dk and market that to our existing customers entitling them to buy new brands, buy into new categories, new types of products that they don't usually shop with Matas.

And we are seeing that, that strategy is working. We have seen that for a number of quarters or actually half of the growth in Q1 is attributable to the recent brands and products that we have introduced. Very happy with that result, and we see it as good proof that customers actually want to shop beyond their usual fare with Matas. So this is we find another quarter that proves that strategy to be sold and be a good driver of growth even in a woppy market.

And if you turn to the next slide, one of the numbers that we are particularly happy with is the e-commerce growth of 26% in the first quarter. And of course, as many of you know, e-commerce as such has had a long period of slow growth online, if you look at the markets after COVID, because COVID obviously boosted online, and we're seeing even compared to our peak in COVID at 12% up, and of course, 26% compared to last year. Driven both by our core assortment and core offering, which just continues to deliver results, but also the assortment expansion, which gives us growth above and -- way above and beyond what the market is able to do.

If you turn to the next slide, one number that we monitor quite closely even though it's not very significant in terms of revenue, this is the next step and next phase of expanding the assortment online, namely, to allow our colleagues in the store to offer the broadest assortment, the entire online assortment to customers shopping in our physical stores.

So we spend a lot of time educating our colleagues in the stores on what's available online and training them on how they can advise the customer and inspire the customer to buy from our online assortment. And for store managers, this is really interesting because she is no longer just dependent on her footfall and the assortment she has in-store, but she can actually do additional sales that are not cannibalizing to the business because it's new categories, new brands, new products, customers that she doesn't have to turn away.

So it's really an initiative that is I think pinpoints that assortment expansion is a lot more than just making the assortment available. It is also the entire group standing behind that assortment, making it known to the customer. So a number we're really happy to see tracking well and even above our online growth.

With that, we'll turn to the next slide, and I will make a few comments on our acquisition of Kicks Group. We announced just before the summer end of June. And if you turn to the next slide, that we will acquire what we consider to be our closest peer based in Sweden, but active in -- across the Nordic region to create a Nordic market leader with an equity purchase price of DKK 700 million, valuation EV/EBITDA of 4.7x.

We target synergies with an EBITDA effect of DKK 140 million, of which DKK 40 million comes from stand-alone improvements in the Kicks business and minimum DKK 100 million in synergies coming from joining the two groups. The acquisition is truly debt financed. And as previously announced, we expect to close during Q3 of the calendar year, and we can now be even more specific and say that we expect the transaction to close. Closing procedures are going exactly according to plan. So we expect the acquisition to close by the end of August.

If you turn to the next slide, Slide 13. This is the picture of the combined entity. A Nordic leader in beauty and well-being with DKK 7.6 billion revenues, more than 5 million members, which is really the core of the business, the membership base. Denmark still making up the majority of the markets proposition with very strong online stores and almost 500 physical stores and a sales split with 28% online share of business.

If you turn to the next slide, we as mentioned, expect the case to close on August 31, and that means that we can get going on working on the integration planning and realizing the integration benefits and of course, also being active in the Nordic markets. So we look very much forward to that big step, that big chapter for Matas.

Once we have gotten to know Kicks in detail from the inside, we will set out a date for a Capital Markets Day. We want to really get to know the company and really get to know how it works, and then we will have a Capital Markets Day to announce the strategy for the joint companies. So I will get back to that.

And with that, I will end my comments, and I will hand over to Per to cover the financial results. So if you turn to Slide 15, and Per, it's yours.

[Per Madsen, executive]

Thank you, Gregers. And as Gregers just alluded to, a very strong quarter, and I'm very pleased to go through the numbers. So let's pay it on Page 16. Just as already mentioned, a 9% growth in our revenues. And if you look at the gross margin, we also managed to keep that through the quarters compared to last year, even with the continuous expansion of our assortment.

And that also is reflected in our cost. As you see, we have an increase in our cost base. If we look at our staff costs, a slight increase, of course, also reflecting the union agreements and the increases that was already planned for this year.

On our other costs. That is, of course, impacted by two things, predominantly. And that is online. As already mentioned earlier, growing online, 26% also drives some of our costs, such as transportation and so forth. And the other big element in our cost base is really the whole assortment expansion and the way that we invest in that, which will also be reflecting in the growth we just mentioned of 9%. So all in all, following basically the whole initiatives around our expansion of our assortment.

Last but not least, EBITDA in line with expectation and also the guidance we've given on the EBITDA margin, adding almost DKK 10 million on the actual numbers of EBITDA for the quarter.

Turning to our inventories. As you'll see for this quarter, we have a slight increase compared to last year in terms of percentages, 21.9% of -- compared to our last 12 months revenues. So what is really driving that increase is twofold. One is the whole assortment expansion, of course. And then it's also about the increase sales and the speed of our sales, so we decided to increase our inventory slightly also to make sure that we will be able to continue the very short delivery time to our customers once they order, especially online.

And if we then turn to our cash flows. Of course, increasing inventories will impact our cash flows, but that we've really managed through our trade payables. And you can see our working capital, a very big improvement compared to last year, and that is predominantly driven by our account's payables.

There is a bit of timing in that, which will be normalized over the next couple of quarters. But just to keep in mind, once we increase our inventories, we actually manage that from a cash flow perspective with our account's payables. Otherwise, not that many movements, as you will see, total free cash flow before special items, DKK 217 million, and that is DKK 201 million if we include the special items.

Last but not least, I just want to highlight our gearing, our debt position as we are approaching the closing of the Kicks acquisition as Gregers was talking about which we expect to happen end of this month. With the current cash flow and the performance in the first quarter, we expect our gearing at the end of the transaction to be in the range of 2.8x to 3x, which again, is within the range of our long-term guidance on our gearing for Matas Group.

And with that, I will hand over to the operator for questions.

[Operator]

[Operator Instructions] The first question will be from the line of Sebastian Grave from Nordea.

[Peter Grave, analyst]

First off, congratulations on a very strong quarter. I think the top line story speaks for itself. So I'd rather want to go about the EBIT margins. You see better-than-expected top line, but you retain your margin guidance. So really what I want to understand where does this extra growth does -- why does it not translate into operating leverage?

And also, you see a lot of share of Mass Beauty, which usually comes with better profitability. So why that's -- why is your gross margin slightly down year-on-year? Any comments would be helpful.

[Gregers Wedell-Wedellsborg, executive]

Yes. So overall comment from my side is that the way we run the business is, of course, we have our expectations for the year. If we see opportunities to stimulate growth, that is a good business case. And if we have room in our performance to accelerate growth initiatives to move forward growth initiatives and get more momentum behind the growing Matas Group, we will absolutely execute on those opportunities.

So don't see the gross -- or the EBITDA margin decline as just a mechanical result. It is also a result of us deciding to fuel, for example, marketing or fuel assortment expansion or bring on competence that we know we will be needing to execute on our growing Matas Group strategy.

So absolutely, this is a function of us seeing that the strategy works and deciding to spend some of the headroom that we have compared to our guidance to fuel growth and invest ahead of the curve.

As for the gross margin, I think it's not a big deviation from last year. So it's a lot of factors, but I would point to one, which is the assortment expansion in the early phases of an assortment expansion, you would normally not have the same trading terms or terms of trades with suppliers because your volumes are not that great. You're introducing products often with campaigns. So we know that as we introduce new categories, new brands, new products, we have to stimulate with the campaigns.

And that actually also goes to the EBITDA margin that we compared to the revenues on those new products, we overinvest in marketing just to create awareness that we now also have sports nutrition on our shelves just to take one example. So just educating the consumer, spending more on promotion. This is a ramp-up investment, if you will, in getting the long-term growth going.

And as the categories and we start seeing that with some of the early categories that we introduced Professional Hair Care that we introduced a couple of years back as we see the momentum, as we see the habit with consumers then marketing ratios go down, our trade terms improve, our gross margins go up. So both from a sales perspective and from a profitability perspective, we are seeing that our growth strategy is really delivering.

[Peter Grave, analyst]

Okay. So is it fair to say that what really drove the guidance upgrade was better-than-expected assortment expansion?

[Gregers Wedell-Wedellsborg, executive]

Yes, that's fair. And we got a little tailwind from exceptionally sunny weather in Denmark leading to sunscreen sales, but also just to people going out a lot, partying a lot. And when people are happy, they shop at Matas. So that as well. So it was an exceptionally good quarter with good [indiscernible].

[Peter Grave, analyst]

I guess then given the poor weather in July, you're seeing a poor trading environment, just kidding.

So maybe my second question here, you booked DKK 21 million in special items in Q1, which as you say related to the Kicks Group acquisition. Are this part of the DKK 100 million integration cost, which you previously guided for?

[Per Madsen, executive]

As we -- as presented when we presented the acquisition of the Kicks Group. We basically said that the total acquisition cost of the Kicks Group amounted to roughly DKK 750 million. In that DKK 750 million is roughly the DKK 700 million that we need to pay for the Kicks Group. And the remaining DKK 50 million is the transaction cost associated with buying Kicks. Then we have set aside DKK 100 million for all the integration costs that is -- will be coming over the next couple of years. So it's actually two separate elements.

[Peter Grave, analyst]

Okay. Okay. So this is part of transaction cost and not integration costs?

[Per Madsen, executive]

Yes, this is part of transaction costs.

[Peter Grave, analyst]

Okay. That's very clear.

[Per Madsen, executive]

As -- at the end of August, of course, we will then start initiating the whole integration and then there will be other kind of costs coming on.

[Peter Grave, analyst]

Okay. That's very clear. Adjusting for special items, your SG&A base is up roughly 9% year-over-year. Is this is the kind of level that we should be looking for, for the remainder of the year?

[Gregers Wedell-Wedellsborg, executive]

Sorry, I didn't get the question.

[Peter Grave, analyst]

Sorry, I guess. So adjusting for the DKK 21 million in special items in Q1, your underlying SG&A base is up roughly 9% compared to last year. So is this the level that we should be looking for, for the remainder of the year? i.e at 9% higher...

[Gregers Wedell-Wedellsborg, executive]

Yes, I think where most of us are used to SG&A being a fixed cost. In our case, SG&A also covers rival costs relating to the online business. So there's that [ vital ] element. So really depending on the channel mix, you'll see SG&A acting in different ways because shipping costs are in there. So it's really relating to the mix of the business.

[Peter Grave, analyst]

Okay. That's fair. And then the last one from side. So could you confirm that your margin guidance still includes 1 percentage point margin dilution from the assortment expansion and in international initiatives, including investments in Matas, SA and Matas and all?

[Gregers Wedell-Wedellsborg, executive]

Yes, that is correct.

[Peter Grave, analyst]

And then maybe just a follow-up then. So does it make sense to scale back on investments in web shops, Matas web shops in Sweden and Norway, given that you will have Kicks on board in less than a month?

[Gregers Wedell-Wedellsborg, executive]

I think everything related to what we will do in Sweden and Norway following the closing, we will speak about post-closing. But obviously, this is an opportunity to assess how fast and how much to invest in Matas studies, and that's obvious. But we'll comment on that after closing.

[Operator]

It seems we have no one in the line, so we will just have a brief pause for new questions could be registered.

As there are no further questions at this moment, I will hand it back to the speakers for any closing remarks.

[Gregers Wedell-Wedellsborg, executive]

Thank you, operator. Thank you, everyone, for joining on what is a very busy day. I know we are really, really pleased with this quarter because going into an acquisition of Kicks, going into a next phase, having a Danish business performing like this, both commercially and strategically, I think just gives us that solid grounding and that momentum.

So we're not on our heels. We're really leaning forward and we're really looking forward to with a lot of surplus both on the management teams and, of course, financially going into the acquisition and entering new markets. So thank you very much for joining the call, and we will get back. Thank you, operator.