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Edited Transcript of MATAS.CO earnings conference call or presentation 27-Feb-20 9:00am GMT

Allerod Mar 11, 2020 (Thomson StreetEvents) — Edited Transcript of Matas A/S earnings conference call or presentation Thursday, February 27, 2020 at 9:00:00am GMT

Ladies and gentlemen, welcome to the Matas Q3 2019/2020 results conference call. (Operator Instructions)

I’ll now hand the floor to CEO, Gregers Wedell-Wedellsborg. Please begin your meeting.

Thank you, operator. Good morning, everyone. Welcome to our presentation covering the third quarter of the 2019/’20 financial year. With me on the call today are our CFO, Anders Skole-Sørensen; and Elisabeth Klintholm, our Head of IR. I will start out with the highlights for the quarter. Then Anders will take you through the presentation of our third quarter results. And finally, I will comment on our strategic progress and on the upgraded and revised outlook for this financial year.

As with previous quarters, Q3 is impacted by the implementation of IFRS 16, but we will comment on the numbers on a pre-IFRS 16 basis in order to be able to make comparisons and explain developments compared to the last year. We look forward to taking your questions at the end.

Please turn to Slide 2. The Christmas quarter truly was a stellar quarter for us. It was the biggest quarter we have ever had. We saw a top line growth of 7.4%. We saw notably a like-for-like growth of 4.7%. That’s the highest like-for-like growth we have seen in Matas in 24 quarters, and we saw a record growth even in our biggest quarter on matas.dk of 84%. We also noted a very clear omnichannel effect. More than half of matas.dk customers choose pick up in-store and matas.dk sales, therefore, generated more than 250,000 store visits.

Please go to Slide #3. As for the numbers, the highlights for the quarter were as follows: revenue of DKK 1.173 billion, up DKK 80 million from last year. The EBITDA margin before special items came in at 18.7%, the same level as the year before. Earnings stood at DKK 219 million, up DKK 13 million compared to DKK 206 million in the same quarter of last year.

If you go to Slide 4, Anders will go through the financials in more detail.

Thank you, Gregers. As already mentioned by Gregers, overall, we saw an increase in revenue of 7.4%. And growth was positively impacted by 3 factors. First of all, Black Friday was the biggest driving day in all of the Matas’ 71-year long history. Secondly, revenue from Firtal was having full effect in the quarter against only 1.5 months of last year. And finally, as already said by Gregers, strong online growth on matas.dk at 84%, of course, helped overall like-for-like growth.

It was, as said, an underlying like-for-like growth of 4.7%, and it should also be noted that the like-for-like growth was positive in every month of the quarter. As to our physical stores, sales were down year-on-year in the quarter, but only by a little less than 1.5%, which was the lowest rate of decline we’ve seen this financial year.

If we look at gross margin, the gross margin in the quarter was 43.9%, which is marginally down from 44.0% in the same quarter last year. With Kosmolet accounting for about 1 percentage point of the gross margin, the underlying gross margin that is without — if we had not acquired Kosmolet, [also] by around 1 percentage point. This decline was primarily driven by higher campaign activity as well as the ongoing channel shift from our physical stores to online. With higher overall sales, total gross profit for the quarter rose by 7.1% or DKK 34 million, in spite of the marginal drop in gross margin. When we look at costs, the overall operating cost that is before IFRS 16 rose by a little more than DKK 21 million year-on-year in the quarter. A major part of the increase was due to added costs from the acquired businesses of Firtal and Kosmolet. All in all, that accounted for just shy of DKK 19 million. And in addition, increased activity on matas.dk led to an increase in costs. And I will come back to this in a little more detail later.

If we look at earnings, EBITDA before special items was up by DKK 13 million, as mentioned, to DKK 290 million. Adjusted profit was DKK 143 million against DKK 140 million in the same quarter of last year. Free cash flow, which I will also come back to, declined DKK 18 million from this third quarter of last year. If we added the number of transactions for both stores and online, they were up by 2.2%. And the basket size grew by 2.0% or DKK 3.5. Both these numbers are made as only, i.e., they include matas.dk, but not transactions from the Firtal Group. Overall, in the quarter, we did continue to see traffic moving towards online where Matas is very well positioned to serve our customers through both matas.dk as well as through the workshops operated by the Firtal Group, such as, for example, helsebixen.dk or Made4men.dk. In our physical stores, we continue to see declining footfall, which we were able to partially counter by an increase in the basket size.

With that, please turn to Slide #5. On this slide, we take a quick look at the category performance. In the third quarter, we saw the trends from previous quarters continuing, with Beauty increasing by 6.5% in sales overall. Beauty amounts to 74% of total sales. Mass Beauty increased by 6% and the High-End increased by almost 7% in the quarter. Vital — the Vital area increased by 13.3%, again, the Firtal acquisition here made a big difference, but also more focused on growing the category health. The Material business increased 7.1%. And finally, the small Medicare segment increased sales by almost 19% on the back of the relaunch of Matas Medicare and the higher sales of special skin care products. Please note that the category growth data includes sales from Firtal, which has a positive impact as Firtal was up fully in the numbers last year as I mentioned before. I can, however, inform you that even if we strip out all Firtal numbers from the segments, all segments still show growth in the quarter.

With that, please turn to Slide #6. On Page 6, you can see the sort of longer-term development in revenue growth, gross margin, EBITDA margin and the absolute level of EBITDA, again, across all the special items. The numbers pretty much speak for themselves, but I just will point to a few salient figures. We are very happy to see that revenue growth is now on a more positive trend that we’ve seen in recent quarters. We still continue to see something that we’ve talked about in previous quarters, i.e., a stabilization of the gross margin because we, as I already said, we have positive impact on Kosmolet, which is being offset by the channel shift. EBITDA margin is, again, still declining, but the rate of decline is much lower than we’ve seen historically. So we are pretty positive on that as well.

With that, please turn to Slide #7. In Slide #7, we’re digging a little more into the cost development. As we’ve already told you, we implemented an efficiency program in the second quarter of this financial year, aimed at making sure that costs do not outpace revenue and earnings. The efficiency program was aimed primarily at 2 goals. Firstly, that wages and other costs at the store level develop in line with sales. And secondly, that the headquarter cost do not outgrow sales. The measures we took mainly affected store operations, but headquarter costs were also targeted. As I mentioned before, in Q3 of this year, overall operating costs before IFRS 16 rose by DKK 21.2 million. Of that, DKK 18.7 million came from the acquired companies Firtal and Kosmolet. In addition, our efforts to drive online growth also resulted in increased operating costs. We had our new webshop in Humlebaek up and running at the end of the second quarter of this year. But as I’m sure you are aware, having a facility up and running and running the facility in an (inaudible) way are 2 very different things. As our logistics director have pointed out repeatedly, it only takes about a year to get a new big setup like our webshop in Humlebaek to run fully efficient. For us, this means that Humlebaek is still on a steep learning curve. And while we managed to meet customer expectations, both around the largest Black Friday ever and for the remainder of the Christmas quarter, this came at a cost. A cost which showed up both in other external costs and in staff costs. So the data on this slide shows an increase in both other external costs and staff costs, even after we strip out Kosmolet, Firtal and special items. What is actually shown is an underlying picture where costs in the stores and in our headquarters, not related to our online business was tolling that this was more than matched by costs associated with our online operations. Thus, the implementation of the efficiency program did help reduce the underlying cost base in the quarter, and we expect it to do so for the financial year as a whole. And when we look at the numbers for that financial year as a whole, we expect the efficiency actions to reduce the cost base by around DKK 24 million — sorry, DKK 25 million. Furthermore, the benefits of this program will be carried into our upcoming financial year 2021.

With that, please turn to Slide #8. On Slide #8, we are looking at inventories. If you look at the numbers in total, inventories were up by almost DKK 100 million, DKK 98 million to be precise in the third quarter compared to the same quarter last year. 2/3 of the increase was driven by the new webshop and facility plus the addition of inventories from Kosmolet and, to a lesser extent, increased inventories at Firtal, as the business was growing. 1/3 of the increase was due to a management decision to increase inventories to avoid stock out situations. The ambition for the fourth quarter of this financial year is to lower inventories, and we’ve already set a number of actions in motion to ensure that we fulfill this ambition. If you follow us closely, you may already have noticed that we put on a — well, for the customers at least, a better post-Christmas sale than usual, with more products on sale and EBIT discounts. This was obviously good for sales, and it helped reduce inventories. But at the same time, it had a one-off negative impact on profitability.

With that, please turn to Slide #9. On Slide #9, we’re looking at the cash generation in general. Cash generated from operating — operations, sorry, amounted to an inflow of DKK 209 million before IFRS 16 in the third quarter. A year earlier, the period was — saw an inflow of DKK 337 million. The decrease of DKK 128 million was driven by a decrease in trade payables in Q3 this year compared to a significant increase in trade payables in the year earlier. Trade payables still mainly due to the timing of the supplier payments around the turn of the year. We paid some of our suppliers earlier than last year because we build up inventory ahead of the Christmas season a bit earlier than we did in the year before.

With regard to CapEx, the CapEx in the third quarter was DKK 18 million higher than for the same period last year, primarily due to the investments we made in the Matas Life stores. Cash flow from investment activities fell as a result of just one small acquisition in Q3 of this year compared to the larger Firtal acquisition in the year before. As a result, free cash flow fell by DKK 18 million to DKK 110 million in the quarter.

With that, I will hand you back to Gregers, and he will talk about strategic progress, starting on Slide #10.

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Gregers Christian Wedell-Wedellsborg, Matas A/S – CEO [4]

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Thank you, Anders, and I will comment on 3 of our 5 strategic pillars. Win online, where our ambition is to go from number 3, back in May 2018 to be in the undisputed market leader. Second, reignite store growth, where we are working to renew and consolidate our store footprint. And finally, the pillar that goes with the open new growth path, the efforts we’re making to find new revenue streams.

So please turn to Slide 11. As for digital, our ambition is to be the undisputed market leader and the first choice for the Danish beauty consumer online as well as off-line. And in the Christmas quarter, we made a really big leap forward towards that ambition. Our digital business, including Firtal, now accounts for 16.2% of our total sales, up from 8.5% last year. As already mentioned, we announced a growth of 84% on matas.dk. It’s a new record, and there’s no doubt that we made significant market share gains in the Christmas quarter. That is the seventh consecutive quarter of at least 50% growth on matas.dk. The key factor enabling this growth is the new dedicated online logistics facility, which allows us to make fast deliveries to the customers without disturbing the off-line business. As a result, we’ve seen a significant uptick in customer satisfaction online, and we executed Christmas without logistical issues. And I think this slide shows, more than anything, the progress that we have made in online over the last couple of years. This is the — from the official annual survey of e-commerce in Denmark, and it shows that matas.dk has moved from a rank of #20 among the most used webshops to a position of #5 last year, ahead of some well-known names. Also Firtal. And I’ll return to Firtal in a moment. It’s delivering according to plan and added a bolt-on acquisition, and that I will return to in a moment.

Please turn to Slide 12. In the quarter, we continued our rollout of the Matas Life upgrade program for the stores. We now have 22 Matas Life stores opened at the end of the quarter, Q3, and we plan 8 additional store upgrades in Q4 of ’19, ’20. We continue to evaluate the stores on 3 parameters, the customer response, both qualitative and quantitative. We look at the total — our total share of the local market. And of course, we look at the financials of the investments in-store upgrades. We have spent a lot of time in the quarter fine-tuning the concept, we are testing medium and life upgrades for — especially what we call 1:1 upgrades to the same-store renewed, and we also look into a lot of operational improvement in the rated stores. In the quarter, we saw an improvement in the performance of the Matas Life stores relative to peer stores. And the quarter also confirmed that we should continue to work on store mergers, relocations and expansions, where we see solid financials from investing in the upgrades. We maintained that we require landlord co-financing. We don’t want to be the only ones to invest in the future of physical retail and that increased consolidation of stores is a strategic priority.

As for the 1:1 store upgrades, we have a clear picture of what kind of cases are good and which are not so good. Certain store types and locations merit investments. Again, we require landlord co-financing to do the investments. And we’ve seen some early results from the medium and light upgrades that indicate that we can do the upgrade at a lower FX per store.

Please turn to Slide 13. In the quarter, in our quest to look for new revenue streams, we acquired Din Frisør Shop and that’s a company that operates 2 smaller webshops within the professional haircare and beauty segment. The rationale behind this small acquisition is, this is really what Firtal is good at, small bolt-on acquisitions where we can do a rapid integration of the tech of the organization and the commercial platform so we actually are on track to completing a full integration of that company into the Firtal Group by the end of Q4. This kind of case has very tangible short-term cost synergies and it’s a very low-risk case with a good short-term payback. In addition to that, we bought access to the professional haircare market. This is a segment of the beauty industry that we have not historically been strong in. We’ve had a very low market share for products that are usually sold through salons. And we see that some of our online competitors, they have a strong point in that particular segment. So we now have access to that kind of assortment as well.

And then finally, as is the case for the total Firtal Group, we now have channels where we can engage in price fighting, if that’s the case, with a very low-cost operating model so that we can respond quickly to price situations in the markets.

As for the company that we acquired, it’s the smallest company. It’s DKK 30 million turnover. It grows above 10%. It is a profitable company even before synergies, and it operates 1 physical salon in Aarhus and that is a supplier requirement to be able to carry the products. We paid DKK 15 million for the company, and there is an earn-out of DKK 5 million. Closing was on 9th of October 2019.

Please turn to Slide 14. As for our financial target for 2019, ’20, we have made some small adjustments. We have upgraded our estimates for overall revenue growth and like-for-like, first, in connection with the trading update in January in light of more positive sales growth in the Christmas quarter. And now with our Q3 results, we have seen the good momentum from Christmas continue into 2020. As a result, our financial guidance for the full year 2019, ’20. But these 2 items are an overall revenue growth of above 5% previously, around 5%, and underlying like-for-like revenue growth above 1.5%, previously, around 1.5%.

In Q4, ’19/’20, in line with our strategy, we will continue to fuel online sales growth, even though this will lead to short-term margin dilution as sales shift from stores to online. Also, as Anders mentioned, the logistics facility in Humlebaek is not yet operating at scale and cost ratios in Humlebaek will benefit from a rapid increase in volume. Also, we have decided to reduce inventories. This is an issue we pay a lot of attention to, and we have decided to clear more overstock than usual in our January sales. These 2 factors will have a slight negative impact on the EBITDA margin in the fourth quarter, but we believe they are bright and good measures, especially for our medium-term online profitability. Therefore, we specified that our estimate for the EBITDA margin before special items is between 14% and 14.5% for 2019, ’20 compared to our previous estimate of between 14% and 15%. Our CapEx guidance is unchanged at DKK 150 million to DKK 170 million.

Please turn to Slide 15. Summing up, we completed the first 9 months with a good top line growth as well as like-for-like growth ahead of our expectations. We are very, very satisfied with our online progress and the positive omni-channel effects that we’re starting to see. Matas Life rollout has touched almost 30 stores at the end of Q4, and we continue to fine-tune the concept. And Firtal has completed the minor bolt-on acquisition that I mentioned, adding a new growth option in the professional haircare segment.

These were our comments for the quarter and the outlook for the year, we are now ready for Q&A. Operator, I hand the line to you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Magnus Jensen of SEB.

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Magnus Thorstholm Jensen, SEB, Research Division – Senior Equities Analyst [2]

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I have just 2 to start with. First of all, you talked about that the mergers of stores is sort of a preferred way to basically upgrade your network. Could you talk about — as I see it, you’ve done 3 mergers in this quarter. Can you talk a bit about how much revenue do you lose maybe when you do these mergers? That’s my first question. The second question, you talked about improving your inventories, what would sort of be a normalized level for you guys when you sort of get it trimmed and optimized? That’s my question.

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Gregers Christian Wedell-Wedellsborg, Matas A/S – CEO [3]

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All right. Thank you. I will comment on the first question. Anders will take the question on inventories. So for mergers, we really have 2 kinds of cases for mergers of stores. We have cases where we believe that we can capture or even grow revenue in the local market by building 1 big store rather than 2 smaller stores. That’s one kind of case. And the other kind of case is that we see that we can do the EBITDA improvements by consolidating 2 stores. We operate both kind of — look at both kinds of cases and the experience that we’ve seen from the last couple of quarters, is that the — that we are quite right, that there are these 2 kinds of cases. In some case, we can actually capture more sales in the market by doing a consolidation. And in other cases, it is a purely earnings focused maneuver. Anders, can you comment on the inventory?

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Anders Tormod Skole-Sørensen, Matas A/S – CFO [4]

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Yes. Well, at the inventory level, I think it’s fairly obvious that we felt at the end of the third quarter that this was definitely a level too high for our comfort. Now we’re not going to give out a specific number and say it’s going to be x percent of turnover. But obviously, there is a connection between turnover and inventory levels. And at the same time, we also went into the new facility, Humlebaek, well knowing that there is the cost associated with shifting the online business out of our existing headquarter facility, that does carry some extra inventory. And we knew that was the case. But obviously, we will be working continuously to optimize on it. We have absolutely no interest in carrying more inventory than is necessary. And that actually, as we speak, we are in the process of introducing a new system for forecasting the need for goods in our stores, and that actually includes our online store, which hopefully will help us also in optimizing inventory levels. But I can’t give you a precise number. Of course, I can understand why you’d want to see that.

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Magnus Thorstholm Jensen, SEB, Research Division – Senior Equities Analyst [5]

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Two follow-up questions just to the inventory part. Are there any sort of synergies that you can realize with the Kosmolet and Firtal and your own inventory in Humlebaek? That’s one question. And the other question is, when will this new system that you talk about be up and running?

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Anders Tormod Skole-Sørensen, Matas A/S – CFO [6]

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Yes. The first thing is that we — at this moment, we have decided to run Firtal as a stand-alone business, day 1, and I think we talked about this earlier on. A very efficient system. So right now, we wouldn’t add — we wouldn’t add anything by introducing things. As to Kosmolet, that is obviously an area that we’re looking into. And hopefully, we will do some consolidation there. It’s not the biggest part of this number. So even though it will be nice to do, so it won’t be a huge impact. As to our new system that’s being implemented, that is being rolled out and should be fully operational at the end of the summer. But of course, I also have to warn you that there could be some [choosing] problems before that runs up to go.

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Operator [7]

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Our next question comes from the line of Poul Jessen of Danske Bank.

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Poul Ernst Jessen, Danske Bank Markets Equity Research – Senior Analyst [8]

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A few questions. First, on the off-line stores. If I do the math on personal revenue, then I get to — that you, for the first time for quite some time, has increasing revenue per store in the off-line space as well. Just see if you would confirm that? Then I heard you — talk about the sale you mentioned for the fourth quarter, which has been, I don’t know if it’s aggressive or expensive. Should that have a year-over-year impact on the gross margin? Or is that the same level as last year? And then finally, on the Firtal, you have increase in revenue of DKK 36 million approximately year-over-year. Can you give an indication on which product segments that they are distributed? Where are the majority? Of course, they are in Vital, but which lines otherwise are they involved in?

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Gregers Christian Wedell-Wedellsborg, Matas A/S – CEO [9]

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Okay. We’re rapidly doing calculations on your first question. But as Anders mentioned, we saw the decline overall in stores at a very low level compared to previous quarters, and we have fewer stores. But we can’t answer exactly to that at this point. As for your question on Firtal, and Anders will take your second question. Firtal is primarily within the Vital phase, but they also have items in the Mass Beauty segments. And with the addition of the new acquisition, we will also have a little bit of revenue in the high end and there is some sales in the other segments. So I’m afraid that’s not super helpful, but you can count on that the majority is in the Vital category.

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Anders Tormod Skole-Sørensen, Matas A/S – CFO [10]

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Yes. As to the effect of the sale, it is, as I said, a one-off negative impact in fourth quarter gross margin. And of course, it’s not huge, but it doesn’t help fourth quarter margin. I think that’s the way I’d put it.

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Poul Ernst Jessen, Danske Bank Markets Equity Research – Senior Analyst [11]

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And then 2 other questions. The acquisition you just made, can you indicate what kind of margins they are running at currently before you took it over?

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Gregers Christian Wedell-Wedellsborg, Matas A/S – CEO [12]

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We don’t disclose that, but they are profitable and I think the thing to really take note of is that it’s a case — it’s not a sales synergy case. We can drive sales for them as well, but it is a cost synergy case that will help us towards our ambition of having an online business that is as profitable as our off-line business long term. So we can take off and have taken out quite significant cost items in that acquisition integrated with Firtal, who are already operating a very efficient business.

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Poul Ernst Jessen, Danske Bank Markets Equity Research – Senior Analyst [13]

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And are they sourcing through official channels? Or is it the parallel imports?

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Gregers Christian Wedell-Wedellsborg, Matas A/S – CEO [14]

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They are sourcing official, and they do some parallel, as does Matas, I should mention, once in a while. It’s a very, very limited part of our business. But once in a while, if we can’t find an agreement, we will have to resort to that as well to be competitive and have the assortment that the customers are asking us to have.

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Anders Tormod Skole-Sørensen, Matas A/S – CFO [15]

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Just to add to that, that is actually — as Gregers mentioned earlier, that’s the reason why they’re running a hair salon but because they think the hair salon isn’t — is all that great, but that is a part of having these deals with the suppliers.

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Gregers Christian Wedell-Wedellsborg, Matas A/S – CEO [16]

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And you acquired a report for — we just made the call. You’re quite right. There is a slight increase per store in the third quarter overall.

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Poul Ernst Jessen, Danske Bank Markets Equity Research – Senior Analyst [17]

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Okay. And then final question from me about sourcing and the coronavirus. Where are you sourcing from? Is the product or other products coming from Asia? Or is it produced in Europe? Are you trusting — are there any risk of running out off products here?

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Gregers Christian Wedell-Wedellsborg, Matas A/S – CEO [18]

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We have very limited exposure to the coronavirus on the supply side. One, we have a good level of inventories, and we are sourcing from all over the world. So in the medium — short and medium term, we don’t foresee any disruptions. But obviously, for the long term, this is an item that we’re watching very closely.

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Operator [19]

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Our next question comes from the line of Aleksander Edemann of Nordea.

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Aleksander Edemann, Nordea Markets, Research Division – Associate [20]

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I have a few, and I’ll take it one by one. So my first question is that you previously thought about that you want to be indifferent to whether you sell something online or off-line. Can you maybe talk about the profitability from online here in Q3 and whether you have seen any improvement, especially with new fulfillment center in Humlebaek? And also, if you can, it would be very interesting to know if your margin on matas.dk is better than on the Firtal? That was my first question.

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Gregers Christian Wedell-Wedellsborg, Matas A/S – CEO [21]

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Okay. You’re quite right that our strategy is to be indifferent. And we have a very concrete and specific building blocks to get to that point. At this point, we are margin dilutive. If we sell something online, it is margin dilutive to the total business. But you should note a couple of things in that regard. One is that matas.dk is obviously in a growth phase. We are investing heavily in marketing and in acquiring customers. Second, online business is really a scale business, and that is particularly true for the logistics part of the business, but actually also for the business model overall. So in our minds, it is all about getting the growth and getting to the #1 position as fast as possible because we see improving cost ratios as we grow. Specifically for the Christmas quarter as Anders mentioned, Humlebaek is new. We are very, very pleased with their ability to fulfill, but it’s not operating at scale. So it’s not effective right now. As for the margin difference between matas.dk and Firtal, that’s not an issue we comment on specifically.

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Aleksander Edemann, Nordea Markets, Research Division – Associate [22]

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Okay. All right. And then my second question. So despite all these cost savings underlying, which is primarily off-line to my understanding, your other external costs increased by DKK 14 million this quarter, pre-IFRS 16. And DKK 12 million is coming from Firtal and Kosmolet, which means there’s DKK 2 million left, and that must be from matas.dk. So I mean, I guess, matas.dk isn’t offsetting your savings in your off-line stores?

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Anders Tormod Skole-Sørensen, Matas A/S – CFO [23]

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Correct.

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Gregers Christian Wedell-Wedellsborg, Matas A/S – CEO [24]

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Absolutely, that was what I mentioned when we talked about — you’re absolutely right.

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Aleksander Edemann, Nordea Markets, Research Division – Associate [25]

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So I guess, there must be a large increase in cost from [h.dks]?

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Gregers Christian Wedell-Wedellsborg, Matas A/S – CEO [26]

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As we said, that was — we ran up Humlebaek at the end of the second quarter, we had the biggest Black Friday of the company. We had a big Christmas all of that was run through a new system that took some costs.

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Aleksander Edemann, Nordea Markets, Research Division – Associate [27]

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Okay. All right. And then my third question. So excluding customer related to gross margin in Q3 would be 1 percentage point lower compared to last year. So you’re around 43%. Is that mostly caused by online? Or is that caused by more campaigns compared to last year?

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Gregers Christian Wedell-Wedellsborg, Matas A/S – CEO [28]

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It’s primarily the shift towards online, but there are some quarter-specific items as well. The fact that Black Friday was on a payday, as I think we mentioned in the trading update, obviously made the campaign share of the quarter higher. So it’s a bit of both.

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Aleksander Edemann, Nordea Markets, Research Division – Associate [29]

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Okay. All right. Then one more point…

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Gregers Christian Wedell-Wedellsborg, Matas A/S – CEO [30]

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We are seeing a convergence in the gross margin off and online. So we are seeing dynamic picture as to our online profitability. We work on every line in the P&L for our online business.

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Aleksander Edemann, Nordea Markets, Research Division – Associate [31]

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Okay. All right. That sounds good. And then with your lower EBITDA margin guidance to DKK 14 million to DKK 14.5 million, then we can calculate the implied margin for Q4, which is around 10%. And last year, in Q4, you had around 11.6%. And also last year, you had Firtal in your numbers in the Q4 numbers. So what is causing this drop going into Q4?

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Gregers Christian Wedell-Wedellsborg, Matas A/S – CEO [32]

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I think there are 2 very specific issues going on in Q4 that are of a one-off or the short-term nature. One is, as Anders mentioned, we have decided to reduce inventories and NPL overstock at a higher level than they usually do, that will have a slight negative impact on profitability. And the other thing is the Humlebaek operation, which is not yet at scale. And this is something, as I mentioned, as we see online growing, the cost ratios in Humlebaek goes down. So we consider that to be obviously a short-term profitability issue.

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Aleksander Edemann, Nordea Markets, Research Division – Associate [33]

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Okay. And then the last one for today. So this new acquisition of Din Frisor Shop, will the products when you order them online, will they be shipped to Matas stores as well? Is that a possibility?

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Gregers Christian Wedell-Wedellsborg, Matas A/S – CEO [34]

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It could be eventually, but at this point, at this direct-to-consumer. But obviously, as Anders mentioned, we look at the Firtal case in phases. And right now, we see — we think it’s better business to let them run independently and address the consumer with their value proposition rather than to mix the models. But obviously, having delivery to the store as we do with some Firtal products for the new acquisition as well is a logical next step.

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Aleksander Edemann, Nordea Markets, Research Division – Associate [35]

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Okay. And I guess that DKK 30 million in revenue, that is only online?

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Gregers Christian Wedell-Wedellsborg, Matas A/S – CEO [36]

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That’s correct.

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Operator [37]

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And our next question comes from the line of Andre Thormann of ABG.

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André Thormann, ABG Sundal Collier Holding ASA, Research Division – Analyst [38]

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Just the first one, as a reminder, what is the difference really in gross margin between online and off-line in percentage points? That’s the first one.

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Gregers Christian Wedell-Wedellsborg, Matas A/S – CEO [39]

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So we have been shy about giving out that number, and we are still shy about doing that. And the reason, there is not just China, it’s also because even though we are very focused on the channel economics, really, if you look at Matas, you should think about us as an omnichannel business, and you should look at our customer economics, whether we are capable of getting a better share of the customer spend in our categories. And I think the Christmas quarter was the clearest example that, that’s what’s happening. That’s what’s happening that we do build and get a bigger share of the market by being in both channels.

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André Thormann, ABG Sundal Collier Holding ASA, Research Division – Analyst [40]

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Okay, okay. But just because as I heard before, it is converging, as I understand, right? So do you expect that at any point to be the same? Or will it always be low?

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Gregers Christian Wedell-Wedellsborg, Matas A/S – CEO [41]

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I think the P&L of the online business even long term is different from the off-line. And so it’s not necessarily the case that we needed to be exactly the same gross margin to be able to deliver on our ambition to be indifferent. There are lots of other items, especially related to the cost structure of the online business. So I can’t really tell you exactly how that’s going to play out.

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Anders Tormod Skole-Sørensen, Matas A/S – CFO [42]

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Also just to add is the fact that, that’s probably also, even in maturity, there’s going to be a difference between the share of promotional sales online and off-line. And that also makes a difference. So you can’t really necessarily compare them just one-to-one because you could say that a higher promotional share may have an impact on gross margin.

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Gregers Christian Wedell-Wedellsborg, Matas A/S – CEO [43]

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And maybe a final comment. One piece of our strategy is to offer a bigger assortment online than we do off-line. So there will be items on matas.dk that we don’t have in the stores. Some of those items are high-value items that we sell at a lower margin point. But in absolute terms, will contribute very nicely to gross profit.

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Anders Tormod Skole-Sørensen, Matas A/S – CFO [44]

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Yes, good point.

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André Thormann, ABG Sundal Collier Holding ASA, Research Division – Analyst [45]

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Okay. Just on the next one. In terms of these efficiency improvements in the physical stores, can you maybe just elaborate a bit on what exactly it is that you have been doing? And how long you can continue to do that?

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Gregers Christian Wedell-Wedellsborg, Matas A/S – CEO [46]

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Yes. So there are 3 issues — or 3 things that we work on in relation to cost in store. One is what we call continuous improvement. It’s really optimizing every single process in the store to free up time, from back office time in the store to front office in front of the customer. I think that’s — every retailer does that. We do that as diligently as any other. The second is that we — as we operate the stores for Matas Life, we actually adjust our operating model in the stores to allow us to operate the stores more effectively. And the third part is consolidation of stores actually also contribute positively to our salary percentage or our effectiveness in the stores. So there are those 3 levels to improve stores. And I think any retailer would say that this is something that we can — we will and can continue to do. Obviously, there’s a point at which one single store cannot be operated more effectively, and that’s when we consolidate.

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André Thormann, ABG Sundal Collier Holding ASA, Research Division – Analyst [47]

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Okay. But there’s a long way to go before you reach that level, as I understand?

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Gregers Christian Wedell-Wedellsborg, Matas A/S – CEO [48]

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Yes. I think that the combination of those 3 things helps us, that it’s not just a one-off option to cost in stores. We’re only one of them. The first one, it would be difficult at some point, but we have those 2 other mechanisms as well.

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André Thormann, ABG Sundal Collier Holding ASA, Research Division – Analyst [49]

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And which one of the 3 has the biggest potential?

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Gregers Christian Wedell-Wedellsborg, Matas A/S – CEO [50]

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We can’t say at this point. There is something to go forward in everyone of those 3.

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André Thormann, ABG Sundal Collier Holding ASA, Research Division – Analyst [51]

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Okay. And then just my last question. In terms of store opening and closures. Is there any plans during Q4 or next year already?

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Gregers Christian Wedell-Wedellsborg, Matas A/S – CEO [52]

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So we don’t have — we haven’t set a specific target for how many stores we want. We look at our store portfolio every month and assess whether there are stores that are — that we should close. And we maintain that, I think, very sound principle of having very, very short patience with underperforming stores. So we’re still in a position where we don’t have loss-making stores. And we do preemptively consolidate stores that we think are at risk of going in the red. So in Q4, the only thing I can say is that we know that we have opened 6 stores so far — not opened, but modernized 6 stores so far. We will modernize 8 stores in Q4.

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André Thormann, ABG Sundal Collier Holding ASA, Research Division – Analyst [53]

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Okay. But there is — I mean, there is more mergers to come, but will there come any of these during Q4?

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Gregers Christian Wedell-Wedellsborg, Matas A/S – CEO [54]

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Let me just check on that. I think we have a few. We’ll just check. You can ask another question. Oh, yes. I think we have…

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André Thormann, ABG Sundal Collier Holding ASA, Research Division – Analyst [55]

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No, that’s my last one.

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Gregers Christian Wedell-Wedellsborg, Matas A/S – CEO [56]

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I think we have 3 mergers all in all in Q4.

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André Thormann, ABG Sundal Collier Holding ASA, Research Division – Analyst [57]

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And have you already done a few of these or…

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Gregers Christian Wedell-Wedellsborg, Matas A/S – CEO [58]

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Yes.

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Operator [59]

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And we have a follow-up question from Aleksander from Nordea.

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Aleksander Edemann, Nordea Markets, Research Division – Associate [60]

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Yes, just one question. So the updated guidance to revenue above 5%. Is that due to the inclusion of Din Frisr Shop? Or when will that be included in the numbers? I think you’re writing at the end of Q4.

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Gregers Christian Wedell-Wedellsborg, Matas A/S – CEO [61]

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They are included in the numbers, but the main reason for the upgrade is that we operate the underlying, we are seeing above 1.5% in the underlying sales. So it’s natural to say that it’s also above 5% in total sales. And the net effect of the activities in Din Frisr Shop in this financial year are quite limited, to be brutally honest.

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Operator [62]

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And our next question comes from the line of Claus Almer at Nordea.

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Claus Almer Nielsen, Nordea Markets, Research Division – Senior Analyst of Capital Goods and IT [63]

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Yes. First of all, congratulations with the strong growth performance in Q3. I have a few questions regarding the profitability. As I heard you saying that the faster growth online will dilute margins. Is that correctly understood?

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Gregers Christian Wedell-Wedellsborg, Matas A/S – CEO [64]

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Yes, that’s — right now, if we grow more online, it will — it is margin-dilutive. That’s correct.

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Claus Almer Nielsen, Nordea Markets, Research Division – Senior Analyst of Capital Goods and IT [65]

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So — and just not for one quarter. So that is in the case and also for the coming years. Is that — I know you’re not guiding for that.

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Gregers Christian Wedell-Wedellsborg, Matas A/S – CEO [66]

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No, no, no. You shouldn’t read that in. I think what we said is, right now, it is margin-dilutive. And in Q3, there were some specific factors that you should take note of that are of a short-term or one-off nature, specifically the efficiency in the Humlebaek operation.

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Claus Almer Nielsen, Nordea Markets, Research Division – Senior Analyst of Capital Goods and IT [67]

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Okay. Then moving into Q4, the interested guidance for Q4. So as I can calculate then at least in the lower interest range, you will see a significant profit decline year-over-year. And this is despite that you have your cost savings initiatives, and you also have a positive impact from M&A. And I know you have done some extra sales, but can you try to explain a bit more why it is that the profit should decline so much in Q4?

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Gregers Christian Wedell-Wedellsborg, Matas A/S – CEO [68]

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First of all, there is a range, as I’m sure, so you should look both at the top end and the bottom end of that range. But as we mentioned, there are those, the 2 specific factors that we think will have a slightly negative impact on EBITDA. And that is the decision to clear overstocks to reduce our inventories. And second, that Humlebaek comes — it’s a beauty in terms of the customer experience, but it comes at a short-term cost because it is not operating at scale. And we see very clearly, as scale goes up in Humlebaek, so does our cost per order that goes down. So it is about getting growth fast online. That is the sound medium- and long-term strategy.

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Claus Almer Nielsen, Nordea Markets, Research Division – Senior Analyst of Capital Goods and IT [69]

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Sure. But I mean, I know it’s the range, but even in the (inaudible) decline, and as you have the — a range, I guess, we also have to look at the lower end of the range, and that is painting a rather steep decline in profitability despite the positive impacts. I’m just wondering what would trigger such a scenario?

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Gregers Christian Wedell-Wedellsborg, Matas A/S – CEO [70]

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It is the Humlebaek and the decision to clear stock, that are the 2 main factors because we don’t see, obviously, in our top line guidance that we’re giving, we see the business running smoothly. So that’s it.

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Claus Almer Nielsen, Nordea Markets, Research Division – Senior Analyst of Capital Goods and IT [71]

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Okay. And can you quantify the effect from clearing the inventory?

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Gregers Christian Wedell-Wedellsborg, Matas A/S – CEO [72]

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Not at this point.

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Claus Almer Nielsen, Nordea Markets, Research Division – Senior Analyst of Capital Goods and IT [73]

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Is it loss-making? Or just no…

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Gregers Christian Wedell-Wedellsborg, Matas A/S – CEO [74]

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No, no, no.

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Anders Tormod Skole-Sørensen, Matas A/S – CFO [75]

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No, no. Slightly — some always — there’s got to be a few that you would find out there who are loss-making, but we’re not going to quantify a number like that. So that’s not a (inaudible) that we’re going into.

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Claus Almer Nielsen, Nordea Markets, Research Division – Senior Analyst of Capital Goods and IT [76]

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Sure. Okay. And then talking about CapEx, and not so much in Q4, but you have provided few years ahead CapEx guidance, and you seem to be successful with these upgrades to your new concepts. Should we consider or think about increased CapEx? So you will see more stores being operated to new concepts?

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Gregers Christian Wedell-Wedellsborg, Matas A/S – CEO [77]

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We still operate within the framework of our overall strategy that we will invest DKK 600 million in CapEx over the period, excluding acquisitions. So no, at this point, you cannot make any inference that we’re changing that.

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Claus Almer Nielsen, Nordea Markets, Research Division – Senior Analyst of Capital Goods and IT [78]

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But wouldn’t it make sense if these upgrades makes a positive impact on your revenue?

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Gregers Christian Wedell-Wedellsborg, Matas A/S – CEO [79]

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I think at this point, we’re looking at the short-term effects of what we’re doing with the stores and with online. And as we mentioned, when we communicated the strategy, we don’t — we haven’t allocated CapEx fully. So the DKK 600 million is not fully allocated. We do reserve the right to allocate CapEx to where we see the best return on CapEx.

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Operator [80]

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(Operator Instructions) As there seem to be no further questions coming through, I’ll hand back to our speakers for the closing comments.

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Gregers Christian Wedell-Wedellsborg, Matas A/S – CEO [81]

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All right. Thank you, everyone, for taking the time to listen to our Q3 results, and thank you for your questions. You can reach out to us if you have any follow-up questions, then please contact Elisabeth. Our next results will be our annual report, which is due on the 27th of May 2020. Have a nice day. Bye-bye.

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Elisabeth Toftmann Klintholm, Matas A/S – Head of IR & Corporate Affairs [82]

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Bye-bye.

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