Burberry Group plc

Good morning. I'm Gerry Murphy, Chair at Burberry, and I'm joined by Julie Brown, our Chief Operating and Financial Officer. I'll start with a brief introduction before handing over to Julie to discuss our first half results and give a progress update on our strategy. As a reminder, the presentation slides are available on the IR section of our website. A transcript will also be available. We'd be happy to take your questions at the end of the presentation. As announced in late June, our CEO, Marco Gobetti, will be leaving the company at the end of the calendar year. I want to take this opportunity to wish Marco and his family well in their imminent return to Italy. I also want to thank him for his vision and leadership in the transformation of Burberry, his strong partnership with me personally, and for his professionalism and commitment during the transition to a successor, Jonathan Aykroyd, whose appointment we announced a few weeks ago, with effect from the beginning of April next year. We're delighted that Jonathan will be joining Burberry as the next chapter in a very successful career in luxury fashion. Initially a Chief Merchandising Officer at Harrods, followed by 12 years at Kering as CEO of Alexander McQueen, and most recently five years in Milan as CEO of the iconic Italian brand Versace. Jonathan is an experienced leader with a strong track record in building global luxury fashion brands and driving profitable growth. He shares our values and our ambition to build on Burberry's unique British creative heritage and his deep luxury and fashion industry expertise will be key to advancing the next phase of Burberry's evolution. Four years ago, even before I joined Burberry, Marco set out a strategy for transformation and growth by elevating Burberry's luxury status and building on the legacy and values of Thomas Burberry. This transformation has involved some pretty heavy lifting, including rationalizing our distribution to focus more on full price sales of higher value product, eliminating markdown in our mainstream retail channels, and a stronger focus on inventory management and sell-through rates to improve gross margin. Targeting increased investment in key consumer facing areas, including transforming our product quality and offer, especially in our strategic categories of leather and outerwear. re-energizing and elevating the brand to true luxury status and building more luxurious stores and a stronger digital platform. Mostly funded by some tough choices to reduce costs, improve efficiency and expand operating margin. I believe we've made huge progress in what we set out to achieve. On a like for like basis and constant exchange rates, Burberry looks and feels like a higher quality business. Full price business is now a much higher percentage of retail sales. Our own retail sales now account for around 80% of the business, the other 20% coming from our true luxury wholesale partners around the world. Our financial security is underpinned by leverage of less than 0.5 times and cash conversion of over 100%. Critically, Burberry is now firmly in the luxury consideration set, attracting new and younger customers, and our key categories delivering strong full price growth. Burberry is now a substantially restructured business with a much stronger foundation to accelerate revenue growth and deliver positive operating leverage in the years ahead. Central to our ambitions for the future is our determination to integrate responsibility and sustainability into everything we do, building on Thomas Burberry's legacy to secure Burberry's future as a global luxury brand powered by our unique British cultural and creative identity. Thank you. Over to you, Julie.

Thank you, Gerry. I shall now update you on the progress we've made in the half. In half one, we achieved 18% full price com store sales growth versus two years ago, with both quarters up double digits as our collections continue to attract a new younger clientele to the brand. We have seen particularly strong growth in markets not impacted by COVID, travel restrictions or tourist flows. Hence, they are more representative of the underlying performance of the brand, notably Americas and South Korea. So mainland China also continue to perform well despite some COVID-related travel restrictions. Full price sales are driving margin accretion and over the last two years we've seen increases in gross and operating margins in line with our plan to deliver meaningful margin improvement. We are continuing to deliver our brand and product priorities, elevating the customer experience both in stores and online. And a key point that I want to make today, as the world focuses on COP26, is that we continue to drive performance with a strong focus on sustainability. We have set ourselves industry-leading targets to be climate positive by 2040 and to reduce Scope 3 carbon emissions in our wider supply chain by 46% by 2030. Thomas Burberry was a pioneer in sustainability and it remains at the heart of our brand and integral to our strategy to deliver positive change for our employees, customers and investors. And finally, we've delivered excellent cash conversion in the first half with over 100% and we have a strong balance sheet enabling us to grow the interim dividend and recommence the £150 million share buyback programme. I'll cover these main five topics starting with revenue and turning now to the detail of our half one performance. Slide five shows the group revenue summary with comparable store sales up 37% compared with last year and space up 4% at constant rates. Wholesale was particularly strong up 69% driven by the excellent order book, including in-season orders, bringing total revenue to 45% above the prior year before the currency headwind. Turning to retail revenue on slide six, where on the right we share our performance versus two years ago due to COVID. And this shows retail revenue flat with comp sales at 1% offset by space. Within this, full price revenue in the first half grew 18%. With our overall comp, impacted by our strategy to exit mainline markdown and the tight management of outlets as we guided. The markdown exit reduced our comp growth by a mid single digit percentage versus two years ago. Taking a closer look at regional retail performance versus last year on slide 7. Americas has been the standout region, up 38% and accelerating in Q2. The full price business was excellent, almost doubling in the period, with strong sales to new and younger customers. Overall, Asia-Pac grew by 5%, with full price up 14%. Strong growth in mainland China and South Korea that we will describe shortly in more detail was partially offset by trading in Japan and South Asia Pacific, which were impacted by COVID related travel restrictions and store closures. EMEA continued to be challenging given around 60% of Q2 pre-pandemic revenues were generated by tourists. And against this backdrop, EMEA fell by 31% in the half, but improved sequentially to minus 25 in Q2. The region benefited from mainline stores reopening and growth has been driven by local customers and improving trends in both new and repeat business. Within the mix, there was strong growth in the Middle East, good progress in continental Europe, while the UK remained challenged by reduced tourists in London. Encouragingly, EMEA has continued to strengthen as we enter our third quarter. I would now like to share more details of our underlying brand performance from the two regions undisrupted by travel patterns, Americas and South Korea. First, Americas, which is an excellent example of a region where our strategy is driving accelerated performance. Having successfully repositioned the brand, we are focused on increasing engagement with local consumers and we've continued to launch multiple brand activations including a dedicated US capsule designed by Peter Saville and location takeovers in celebration of our summer monogram collection. As a result, we saw our brand continuing to strengthen, with the brand consideration significantly increasing quarter on quarter in the United States. In terms of product, we are seeing success with leather goods full price sales growing high double digits in half one, again supported by dedicated product activations, with accessories also performing very well. As I mentioned earlier, full price sales in the region almost doubled, driven by a triple digit growth in the US market versus two years ago. In South Korea, a region which was relatively unaffected by COVID lockdowns, we saw good evidence of our strategy driving accelerated growth. And building on our efforts to strengthen the brand over the last four years, we have continued to drive increased engagement with local luxury consumers, signing a new brand ambassador singer and actor, Sha Unwu, and planning exciting customer activations, such as the immersive outerwear experience that went live on Jeju Island earlier today. These activities have driven much greater reach and engagement with our brand. For example, one and a half times increase in reach and a two and a half times increase in engagement on social media versus last year. In terms of product, we're also pleased to see our strategic categories performing well with strong full price performance in both leather and outerwear, which are attracting new younger customers to the region. As a result, we delivered 79% growth in full price sales and a doubling of business from new local customers. In mainland China, we have continued to deliver double-digit growth in both quarters, driven by traction with our new strategic product categories, outerwear and leather goods. This result was achieved in the context of regional lockdowns and extreme weather, particularly impacting August before recovering in September. We have driven engagement in mainland China through highly localised, culturally relevant programmes of activities. This included a dedicated capsule collection and campaign for Chinese Valentine's Day, and a series of unexpected partnerships with local Chinese artists for the Summer Monogram Collection, resulting in one and a half times more engagement on social media in Q2 this year compared with last year. We also continue to take steps to strengthen our commitment to consumers in China, and I would like to highlight two initiatives. We are focusing on promoting culture and supporting youth by partnering with local organisations. In line with our decarbonisation agenda, our new store in Plaza 66 opened earlier today and is carbon neutral. Turning to slide 11 and taking all regions and looking at the quarterly progression, we continue to show strong full price sales growth in the last four quarters compared with pre-pandemic levels. Overall, we've now delivered a better quality business, both due to the improved mix of full price revenues and the business being driven by local clientele. With tourists now less than 10% of sales this quarter, compared with almost 30% two years ago. So turning to the underlying performance of the business on slide 13, full price sales have helped to drive strong margin improvement over the last two years. The first chart shows the gross margin adjusted for currency, where we've seen a 210 basis point improvement at constant rates since full year 20 and 180 basis points reported. Adjusted operating profit margins are 120 basis points up at constant currency over two years and this is less visible in the reported numbers due to the adverse impact of currency. Cash conversion has remained consistently high and in half one is over 100%. I'd now like to take a closer look at how we've advanced our strategic priorities regarding brand, product, consumer experience and ESG. So turning to brand, we continue to strengthen our positioning and drive engagement with a drumbeat of activities in the first half, including reinforcing our luxury fashion positioning through our Spring Summer 22 Women's Wear Fashion Show, which generated one and a half times more reach than last year. engaging with our consumers with innovation for example through our partnership with blancos block party creating our first nft which sold out in 30 seconds and bringing new immersive experiences to our consumers including launching an interactive augmented reality brand filter on tick tock for our summer monogram collection which generated 3.7 billion views this was an industry and platform first Moving to product on slide 16, we continue to strengthen our strategic product categories. First in terms of leather goods, by strengthening our women's bag pillars, by delivering a programme of 70 plus pop-ups on Olympia, and by expanding the Lola family, and introducing a new shape, the Rombi, as part of our Spring Summer 22 women's wear show. As a result, we continue to drive full price sales growth in this category. Turning to outerwear, growth accelerated in the second quarter and we've launched a dedicated product moment for this category in the second half of the year, involving dedicated outerwear brand, film and campaign, which launched in October. With strong storytelling on key social media, including a TikTok takeover, as well as activations across physical and digital channels. We also have a dedicated edit showcasing the DK fabric, developing a new lightweight gabardine and applying it to more casual styles to create a DK down, combined with new special details, including quilting techniques, cashmere linings and leather details that are resonating strongly with our consumers. So we continue to elevate the customer experience across all our channels as shared on page 17. Our new store concept rollout is progressing well with 15 stores completed so far and around 50 planned in total by the end of the year. These stores are resonating well with new customers and are driving significant increase in higher spending clientele across renovated locations. We are particularly excited about the launch of Plaza 66 in Shanghai, which will strengthen our luxury position in the region, as well as our commitment to addressing climate change. Additionally, we strengthen the integration between our on and offline channels by launching new content sharing tools for our sales associates, increased appointment functionality, and improved messaging and omnichannel services. Turning to digital, we maintain strong engagement in the half through interesting content such as monogram takeovers on dot com and enhancing product discovery by launching an outerwear hub as a dedicated part of our website. As a result, we've seen good traction with digital full price sales almost doubling compared with last last year. To share an insight from our new customer experience in mainland China, I'd like to share a video of our recently opened store in Plaza 66, Shanghai. Thank you. Turning now to ESG and guided by our purpose and values with sustainability at the heart of the business and brand, we advanced all our priorities within our industry leading ESG agenda, climate and nature, building true allyship and investing in youth and creativity. Our brand is rooted in nature and in the outdoors. We recognise that success for our business depends on conserving the environment and we have been committed to sustainability from our earliest days. We have made significant progress against our goals. We remain on track to become carbon neutral and source 100% renewable electricity across our own operations by the end of 2022. In June, we pledged to become climate positive in the wider supply chain by 2040, setting a new industry standard that goes beyond net zero. At COP26 in Glasgow this month, we introduced our biodiversity strategy to protect, restore and regenerate nature. This includes a significant five-year investment in the Leaf Coalition, the largest ever public-private initiative to finance the protection of tropical forests and a partnership with the Savory Institute to help regenerate the world's grasslands and the livelihoods of their inhabitants. We have laid out a five and ten year roadmap to deliver our ambitions. We also continued to make strong progress against our D&I ambition, widening the scope of our internal council, expanding company-wide training and implementing focused action plans for every region and every function. And we strengthened our wellbeing programme, introducing new global policies to support colleagues. We also expanded our strategic partnerships and we're proud to be the lead sponsor of the inaugural British Diversity Awards in March 22. Continuing our support for youth and creativity, we've expanded our education programmes globally. And we also made a further donation to the UNICEF COVID-19 Vaccines Appeal via the Burberry Foundation, enabling more equitable distribution of the vaccine around the world. As we've just shown, we have achieved a lot over the last six months and I now wish to take you through the main financials on slide 21. So looking at the results for the first half of full year 22 and referring to year-on-year changes at constant rates, total revenue was £1.2 billion, up 45% and back to pre-Covid levels. Gross margin increased by over 100 basis points and adjusted operating profit margin increased significantly and is now ahead of pre-COVID levels driven by the gross margin expansion. Adjusted operating profit was 196 million despite a 20 million currency headwind. Adjusted margins came in at 16.2% and represented an improvement in quality of earnings. And the effective tax rate fell to 24% and we continue to expect this to be around 22% for the year. Adjusted diluted EPS of 33.5 pence was up more than seven times against last year. And free cash flow in the half was an inflow of 104 million with strong conversion levels of over 100%. I shall now review these elements in more depth. So slide 22 shows the main moving parts within the gross margin, which increased 120 basis points to 69.3%. The increase is due to business benefits from a higher mix of full price sales and the product range driving higher average prices. These benefits were more than enough to offset the headwinds we described at the prelims from channel mix, Brexit duties and stock provisions. Turning to the adjusted operating profit margin on slide 23, we saw growth to a margin of 17% at constant rates. Trading delivered the greatest benefit of £270 million. The cost reduction programme delivered a further £20 million of savings in the half and cumulatively savings now of £205 million. we have delivered a completely restructured cost base laying the foundation for future operating leverage included in this half we also have a property disposal gain of 5 million pounds the other major factor to note is the investment in the business of 125 million which comprises investment in marketing visual merchandising the retail network digital and ESG, as well as cost normalisation post the pandemic. Our half one margin was 17% at CER, up over 100 basis points on two years earlier, before the currency headwind. On slide 24, we show the adjusted items recorded in the half, and note that COVID-related rent concessions are treated as an adjusting item in our accounts, consistent with last year. Turning to the cash flow on slide 25, free cash conversion was strong at 104%, reflecting tight working capital management, even as we approach the seasonal inventory build ahead of festive. Despite COVID-19, there were no closures in our hubs or manufacturing sites, and there was no material impact on our supply chain. We continue to deliver on time and with high customer satisfaction, managing inventory levels closely to drive positive working capital performance. This is reflected in the reduction of gross inventory of close to £100 million versus both last year and two years ago. Capital expenditure amounted to £39 million and we expect it to accelerate in the second half and be around £160 million for the year, lower than guided due to efficiencies and phasing. Turning now to our cash position on slide 26, we have a strong balance sheet position, affording investors financial security and with net cash of 0.8 of a billion and leverage is low at 0.3 times net debt to EBITDA. there was a net cash outflow of 73 million in the half largely due to the payment of a full year dividend we have recently undertaken a full strategic review of investments and decided to accelerate investment in the new store concept in full year 23 and recommence the share buyback program of 150 million pounds to be completed in the second half of this year Our financial policy remains consistent to maintain a strong balance sheet and we intend to return to our target leverage range of 0.5 to 1 times in the near term. I thought it was worthwhile reinforcing our medium-term value creation model that has two components on slide 28. Firstly, from our operations, we remain committed to achieving a high single-digit revenue growth and meaningful margin accretion from a full year 20 base at constant currency. And secondly, our capital allocation model, which prioritises firstly organic investment, secondly a progressive dividend, and today we have declared an interim dividend 3% ahead of full year 20. And thirdly, inorganic investments, which are by their nature infrequent. And finally, returning excess cash to shareholders whilst maintaining a solid investment grade credit rating. Turning to our outlook on slide 29, the execution of our strategy is on track, with the management team focused on delivering the growth and accelerate phase laid out in May. By the end of this financial year, we will have finalised our markdown exit from digital and mainline stores, and this headwind will no longer impact next year's performance. As guided, there will be a mid-single-digit headwind from Markdown in the second half of this year compared with last year. A strong order book has resulted in us increasing our expectations of wholesale, and we're now anticipating wholesale revenues to increase by around 15% in the second half and a mid-30% range for the year, which will lead to wholesale being ahead of pre-pandemic levels. Currency is expected to be a 40 million headwind to adjusted operating profit in the full year. And regarding the current year, we are comfortable with market expectations, with adjusted operating profit margin accretion at constant rates likely now to be offset by adverse currency movements. Medium-term guidance remains unchanged, with a high single-digit topline growth and meaningful margin accretion, with a target to achieve a 20% profit margin, barring any unforeseen macroeconomic events. As Gerry mentioned at the beginning, we have undertaken considerable change in Burberry under Marco's leadership. We have transformed our product offer, driving growth in strategic product categories. We have re-energised the brand, which is now firmly in the luxury consideration set. We have rationalised distribution, focusing on luxury doors and re-orientated the business towards full price. including the exit of Markdown. We've maintained our leadership as digital innovators and improved our operational efficiency. And throughout this journey, sustainability has and always will be at the core of our brand and business. We are now in the accelerating growth phase of the journey and well on track to realise our commercial ambitions. I'd like to thank Marco personally for his partnership and leadership over the past five years, for what he has brought to Burberry and wish him every success in the future. And now I will hand back to Gerry.

Thank you, Julie. Today we reported a strong set of results for the first half of the year, of which the board and management are rightly proud. We remain focused on driving our full price business across all regions while leveraging the brand to deliver high quality product through an elevated customer experience. Our financial performance demonstrates our recovery to pre-COVID levels with operational leverage driving the bottom line and cash generation. We've grown the interim dividend and recommenced our share buyback. As always, we continue to put ESG at the heart of our brand and business. Finally, I'd like to thank Marco, Julie and our leadership team for delivering on our strategy and we look forward to welcoming Jonathan in April next year. We now show a short video showcasing some of our first half highlights.