Pandora A/S Ord

Welcome to the conference call for Pandora's Q3 results. I am Michael Bjabri from the Investor Relations team and I am sitting in the Copenhagen head office with the usual team, strictly at least one meter apart. Our CEO, Alexander Latsik, our CFO, Anders Boyer, and the IR team, Christian Müller and Mikkel Hansen. There will be a Q&A session at the end of the call. As usual, please limit your questions to two at a time and get back into the queue if you have more questions. Pay notice to the disclaimer on slide two, and we can jump directly to slide number three. Alexander, please go ahead.

Thank you, Michael, and good morning, everyone, and thank you for joining the call today. It was an eventful last week where COVID-19 escalation led to new significant restrictions on our store network. Most important for us, Belgium, France, and the UK ordered our stores to temporarily close. We will come back to this, but I want to start somewhere very different. The key takeaway should be that Pandora is turning around. We have not yet fully turned around, but the progress is undeniable despite the current trading conditions. We are focused on building and investing in our brand momentum while at the same time, obviously navigating the pandemic. Five out of our seven key markets generated positive sell-out growth in Q3. The only exceptions were France, which was flat, and China. Our online business almost doubled and accounted for more than 20% of sales in the quarter. Very strong numbers compared to historic performance. On top of this, we saw that the trends from second half of Q3 continued into October, where we achieved plus 8% sell-out growth. This gives us confidence in the brand development, but we are also realistic. The recent increase in C19 infections and new lockdowns create new challenges, which we have to manage carefully. Next slide, please. When I joined Pandora, we structured program now around three pillars, brand relevance, brand access and costs. Today, we yet again increase our cost reduction ambitions, increasing the annual run rate target with 200 million kronor to 1.6 billion. This is a significant achievement and it showcases the right mindset and culture in our company. With increased cost targets also comes increased restructuring costs. But I'm very pleased that we can confirm today that the restructuring part of Program Now will be finalized in 2020, despite the disruptions from C19. There will consequently be no restructuring costs in 2021. Our reorganization is showing great results from faster decision making, best practice sharing and closer collaboration. Amongst other things, it's improving conversion rate both on and offline. This is both about operational efficiencies, improving simple things like efficient merchandising, smart media choices, optimizing stock availability, but it's also about securing sufficient growth initiatives for the future. In the last quarter, we saw gradual recovery from C19 and we ended the quarter with only 5% of stores being temporarily closed. However, the recent surges of C19 has changed the trajectory. The latest government guidelines entails that we will have 18% of our stores temporarily closed on Thursday. This is clearly a violation of our financial guidance assumption of less than 10% of physical stores to be temporarily closed for the rest of the year. Anders will come back with more comments on the financial guidance. But it should be clear to everybody that this escalation makes trading in November and December more unpredictable. The important thing to keep in mind during these unusual times are the following. In Jan and Feb before the first wave of C19 and in August through October before the second wave, we saw a very positive sales development. C19 will create noise for a while, but it doesn't change that we're turning around and that the underlying business is improving. Please turn to the next slide. When COVID-19 escalated in March, we focused on ensuring cash, cost and balance sheet. This work became the foundation for commercial comeback, leveraging our scale and financial health. This has been key to our performance in Q3. We showed agility and readiness in the reopening phase, motivated store staff, fresh product assortment, healthy inventory management, and a consistent media push. With these deliberate efforts, we have enjoyed a stronger share of voice in media as well as in mall traffic. But Q3 is already history. We are going into the peak months of Q4 where the store operations are a big question mark and the pressure on the open stores will be at a very different level. This is when our long preparations will come to the test. More comments on this on the next slide. Black Friday is close and kicks off the peak trading season. At this time of the year, our stores are normally completely full of customers and we typically have queues outside the stores. These are the conditions that we have to combine with social distancing and an escalation of COVID-19. We have the liquidity and balance sheets firmly in place for long and sustained period of lockdowns, and we have the financial firepower to execute when commercial opportunities arise, just like we did in the first half of the year. We have introduced 11 new initiatives to ensure a safe and efficient customer experience. These initiatives can be divided into four different objectives. The first one is reducing the transaction time. Average transaction time in December is normally shorter than other periods throughout the year, but we need to cut this even more. Increasing selling space, moving traffic from off to online, and finally flatten the peak trading periods. One example is the implementation of video-based selling. The customer connects with a live Pandorian in one of our dark stores through a new chat and virtual selling platform. It's a technology that allows customers to get the needed advice as well as closing the deal. A great example of how digital tools can support both safety and revenue. We are prepared for Q4 with pragmatic initiatives but the uncertainty is still significant. This is why we also have to be agile and flexible as the trading unfolds. Please turn to the program now section starting on page 10. The slide shows the quick overview of program now. The initiatives were rescoped earlier in the year. We have seen significant results from better use of data and personalization. I'll come back to this in a minute. In China, during Q3, we concluded a revamping of our management. I see the turnaround in China happening in three major steps. The first is to get a new leadership team in place. Secondly, to secure the daily operations including getting a robust infrastructure in place. And finally, to develop a strategic roadmap on how we address the underlying issues. We are in a significantly better place for point one and two. The work on phase three has to a degree been done in parallel. Specifically, we have concluded on the brand position. We are now developing execution to make this come alive. As I've said before, this will be a multi-year journey, but so far we are progressing at a very good pace. Please flip to the next slide. A few words on the retail metrics, as this is important to understand the C19 dynamics and the drivers of our performance. Generally speaking, the basket has not changed much compared to pre-COVID. Average selling price and units per transactions remain fairly stable, but we see large changes in the traffic and conversion. Traffic is almost down 50% in the physical stores, With some variations across markets, the traffic is not surprisingly of much higher quality as there are fewer casual browsers. At the same time, the organization is doing a great job converting this traffic. In some markets, the higher conversion rate is in fact fully offsetting the lower traffic. In the US, sell-out growth was positive in the physical stores. Online traffic is up almost 30% and the conversion rate is similarly strong, creating the significant growth. Some markets, like UK, where the consumer is used to shop online, the channel grows at triple digit rates. At the other end of the spectrum, we have Italy, where online growth appears more normal and consumers are showing a preference for physical shopping despite COVID. One final comment is that the online performance has improved towards the end of October as the physical stores were increasingly impacted by restrictions. Moving on. This is an important slide for me because it gives you concrete data regarding the health of the brand momentum. We're all trying to separate underlying performance from COVID-19 effects. The sellout growth per key market shows a picture that cannot be argued. Something has clearly happened to the brand as you see its broad based growth. Three of our largest markets, US, UK and Germany generate very solid double digit growth. This is delivered in an environment where we face various restrictions in terms of physical stores. With France showing 0% sell-out growth, six of the seven key markets are either flat or in positive territory. China is clearly underperforming, though this is in line with our original expectations pre-C19. It may look strange that the group is declining by 2% when these seven markets are performing so well. This is partly explained by LATAM, where most stores have been closed throughout Q3. LATAM dragged the growth down by 3 points, and we also saw other large markets outside of the top 7, such as Spain and Canada, being severely impacted by C19. The combined sellout growth for the top 7 key markets alone was plus 7%. Finally, it should be noted again that the performance has continued throughout October, which was plus eight. This is clearly strong performance, and we are encouraged about it. We are aware that it does come on top of a relatively soft comparison base from last year, and there's clearly more work ahead to ensure solid and consecutive performance before we finally declare that program now is finished. Next slide, please. A clear driver behind the performance in Q3 is our organizational effectiveness following the reorg we started in April earlier this year. A very good example is the digital hub that has been instrumental in developing and implementing new initiatives to manage COVID-19. By establishing the hub, we have invested in significantly stronger capability as well as expanding capacity. The first tangible evidence can be seen in the new omnichannel features, which we've developed at record pace as part of our Q4 fast response efforts. Another important change is the new global business units sitting under our CMO, Carla. They will be instrumental in both defining a new innovation strategy as well as developing a 360 marketing program to go along with that. Finally, they own the end-to-end view for the various platforms to secure growth both in the base and in the new products. I think we have made strong progress quickly in this space. Next slide, please. Slide 14 outlines our launch tactic in Q3 called launch and leverage. So what do we mean by this? It's a fundamental decision on how we manage product launches. In the past, Pandora's approach was inspired by fast fashion, launching new products every month, giving them four weeks of attention before turning to something new. But Pandora is not fast fashion. Our average customer visits us twice per year. We need to make our proposition and collections consistent and recognizable, ultimately to build long-lasting iconic platforms like Moments. Which, by the way, is a very good example of a platform that we've built and invested in for over 20 years. It is still recognizable and highly relevant amongst our customers. In Q3, we have leveraged and extended the success of Pandora Me and Harry Potter with good success. Both collections were launched last year. We launch and leverage instead of launch and leave. Our product launches and campaigns in September also had more focus on base products under one consistent theme. This makes us less exposed to the success of our new launches because we're campaigning new products alongside base products that we know are performing. The base business represents almost 80% of our sales. Please turn to my last slide before handing over to Anders. I'd like to mention some of the work we're doing with the work stream that we call data-driven growth. First of all, we stepped our efforts up to capture more data. as this will be the bedrock for driving data-driven growth. Today, we capture close to 70% of all buying customers' emails in the US. This is a breakthrough statistic, if viewed in a historic perspective. One way we're using this is to drive our email marketing. Historically, this has not been a source of revenue growth for Pandora. But while email marketing only contributes to roughly 100 million Danish kroner, it's improving rapidly. The growth this year is over 150% built on more personalized emails. This is clearly a step in the right direction and is an indication of the future potential from improved CRM data. Admittedly, this is an area where Pandora can clearly improve further. Now, I'll leave the word to Anders, please.

Thank you, Alexander, and good morning, everyone. And please turn to slide 16. I'm very pleased with how things are progressing in our cost reset program. When we started out the journey back in early 19, we set a cost-saving target of 1.2 billion kroner, and early on we upgraded that to 1.4 billion and now we're upgrading it to 1.6 billion and that's a pretty big achievement by the organization. The higher savings have been identified pretty much across all cost types but with the largest savings we're finding in cost of sales or production costs where we continue to improve efficiencies and simplify processes on the back of the reduction of the product assortment that we did last year. Another improvement is in the other bucket at the lower part of the slide here where we have identified further cost improvements in media as an example where we leverage our global scale and are running several tenders. You should recall that the cost targets only include permanent cost reductions so that the 1.6 billion kroner target does not include the short-term cost measures we have done as part of C-19. And please turn to slide 18 and a short review of the financial performance in the third quarter. As announced in early October, our financial performance in Q3 was better than initially expected. And that goes both for the top line, the bottom line, and cash flow as well. And I'll quickly go into each of these on the following slides. So starting with slide 19 and revenue breakdown. The organic growth was minus five for the third quarter and better than expected due to a better sellout performance. And the organic growth includes a roughly minus 1% negative impact from network changes, as you can see to the far left of the chart here. And that's a result of a permanent closure of 32 concept stores compared to last year. Another building block in the quarter is the lower sell-in versus sell-out as illustrated in the pink box just to the left of the organic growth column, the dark gray column in the middle of the chart here. And that represents the effect from franchisees who... I'll say understandably manage inventory more tightly in these uncertain times. And this part of the revenue bridge should of course give a similar positive effect here in the fourth quarter. And as you can see, there's no impact from forward integration during the quarter. Then please turn to slide 20 and the margin. We generated an EBIT margin of 17.2% in the quarter. And that's a quarter that was impacted by C-19, obviously. And I think it's worth noting that the EBIT margin was only 150 basis points below last year when we filtered out the impact from foreign exchange and commodity prices, despite the the C19 impact in the quarter. Having said that, obviously the margin was down compared to last year and net-net that was entirely due to the deleverage effect that we see as a consequence of the 5% organic revenue decline on the top line. In the 150 basis points impact from commodity and foreign exchange, the major part actually comes from foreign exchange in the quarter. The increase in the silver prices that we saw during the second half of 2019 is still not hitting fully through the P&L due to the hedging combined with the few months of time lag from production until costs hit the P&L. In the prior quarters, you have seen that the cost reductions we are achieving are more or less reinvested into the business and driving the top line. And that's also the case here in the third quarter. We continue to invest, and this includes, for example, strengthening of global functions, establishment of the digital hub, establishment of the global business unit teams, as well as investing in several digital and online initiatives. Then please turn to the next slide, the cash flow. In the third quarter, we continued to generate quite a strong free cash flow and a high cash conversion. The operating working capital remained at a low mid single digit level in percent of the last 12 months of revenue, and we saw quite a nice reduction in trade receivables. But I would also like to highlight what we're writing in the lower right hand corner of the slide here, that our net working capital remained at just around zero in the third quarter. And then I should also mention that our leverage ratio was 1.1 and that is well within our capital structure policy and far below the covenant threshold that we have in our loan facilities. So that completes the third quarter financial review and then I'll go to slide 23 and a couple of comments on the guidance. In the trading statement that we made back in early October, we updated the financial guidance for 2020. And the guidance was based on very clear and tangible assumptions about C19. And the most important assumptions were that, first of all, that there will be no material lockdowns. And secondly, that less than 10% of the physical stores will be temporarily closed for the rest of 2020. And with the recently announced lockdowns, both assumptions no longer hold true. There have been material lockdowns and approximately 18% of the store network will be closed in November. So that's obviously well above the 10% threshold included in the guidance. Nobody knows how the pandemic will spread during the coming days, the coming weeks, and what this means in terms of potential further lockdowns. And under such uncontrollable and external factors, you could say that it would be quite natural to suspend the guidance But as some of you know, most of you know, we are obliged by the Danish FSA to provide a financial guidance, and this is part of the reason why we are not suspending the guidance. Due to the unpredictable development, we have also decided that we will not try to guess or speculate in the C-19 development with regards to geographical expansion and duration, because we will not be right anyway. So we have decided not to change our financial guidance. And the fact is that we will probably be able to deliver on the guidance if there will be no new restrictions or the one has been communicated or announced already. and assuming that the current restrictions are fully lifted when they are supposed to end. And that would mean around December 1 for both France and UK, for example. And the fact that we see that we can deliver on the guidance within these assumptions is based on the strong performance in October and our ability to take consumers online when stores close down in key markets such as the UK. And then you can ask, do we think that is realistic that there would be no other lockdowns and what has been announced so far? No, probably not. But we cannot outline a better or more realistic scenario. And we're just guiding based on the fact as of this morning when we released the announcement. So additional or longer lockdowns clearly represent a significant downside risk to our guidance. And it's not unlikely that we'll have to suspend our guidance if more lockdowns will be announced in the near future and also there's more clarity about the external environment. Please turn to the next slide, 24. As we've said a couple of times already, October has started out well and continuing the path that we saw from September. But, and that is an important but, We will see weakening already from this week, obviously, as lockdowns take effect. Secondly, you should recall that October is a small month compared with November and December and just above 20% of the quarterly revenue. And thirdly, the peak trading season has not yet started and we do not yet see the full implications from social distancing yet. So the implicit fourth quarter guidance on top line is ranging between minus 4 and minus 13% organic growth and between 25 and 29% EBIT margin. And these ranges are obviously wide with less than two months of the trading left. However, this clearly signals the level of uncertainty that we are facing. Given that we've just announced that October sellout growth was plus eight and organic growth in the same ballpark, then the implicit guidance range for November and December is an organic growth of between minus eight and minus 19% roughly. As Alexander mentioned, we are changing our restructuring cost guidance to 1.2 billion kroner. And to understand that change, it should be noted or recalled that the 2020 guidance for restructuring cost before C-19 broke out was 1.3 billion kroner. Then we reduced it to 1 billion when C-19 broke out as we deliberately slowed down certain cash-heavy Program Now initiatives. So the change in restructuring costs up to 1.2 billion is mainly related to two factors, and the bigger part relates to reinitiation of projects that were put on hold due to C-19, and then there's a part related to execution of the higher cost target that we've just announced. All other building blocks to our guidance are confirmed compared to the guidance provided in the second quarter report. So that concludes my part of the presentation. I will now leave the word to Alexander.