Pandora A/S Ord

Good morning, everyone, and welcome to the conference call for Pandora's Q4 results. I am John Beckman from the new investor relations team. I'm here with our CEO, Alexander Latsik, our CFO, Andrew Spoyer, and the rest of the investor relations team, Christopher Malmgren and Mikkel Johansson. There will be a Q&A session at the end of the call. As usual, please limit yourselves to two questions at a time and get back into the queue if you have additional questions. Please pay notice to the disclaimer on slide two. And then turn to slide three. Alexander, please go ahead.

Thank you, John. And welcome to your first announcement at Pandora. We are really excited to have you on board. I would also like to welcome everyone that are joining us for the call today. As already announced in January trading update, we finished 2020 the same way we started the year with a strong performance. While we haven't fully turned around, we clearly see that the brand is turning around. We initiated Program Now two years ago. The objective was to stabilize the top line while maintaining industry-leading margins. I think we have sufficient evidence to say that we're now delivering towards those objectives, even though COVID-19 has muddied the waters somewhat last year. Q4 delivered positive organic growth despite the lockdowns and other related limitations. We had prepared ourselves thoroughly for the peak trading period and it's safe to say that this work paid off. UK and Germany were most affected in the period yet delivering a very strong performance. Five out of our seven key markets generated positive sellout growth in the quarter. The only exceptions were Italy and China, which we'll come back to. Our online business grew 104% and accounted for a third of the sales. While we are happy about the strong performance in Q4, COVID-19 continues to cloud the visibility. With around 30% of our physical stores now temporarily closed, it creates elevated uncertainty about 2021, which we will also return to later in the guidance section. Next slide, please. Our turnaround program now has been running for two years and is nearing its completion. The benefits of the new operating model were evident in Q4, with very tangible progress throughout the entire value chain. One example is a significant improvement in product availability across all trading channels, something we had big troubles with in the prior year. A more data-based approach and focus on top 500 DVs definitely supported a very high level of customer service. Our brand continues to gather momentum. There are a few key drivers behind this like more distinct and relevant advertising, continued strong media investments, significantly smarter targeting, strong progress in merchandising and overall a much stronger organization. These things manifest themselves in higher brand interest, increased traffic, and strong conversion rates, ultimately driving broad-scale sell-out growth. The cost reset program has reached the targeted run rate savings of 1.6 billion Danish kroner, and this has been instrumental in funding the turnaround journey. We are step by step getting ready to switch gears from turnaround and closing gaps to once again focus on healthy growth. We are working on this in the background and defining the road ahead and will at a later point in the year share our long term plans. Our belief is that the core business still holds plenty of lucrative opportunities for growth. But as I said, we'll come back to this further down the line. Please turn to slide six and the business update section. With program now nearly completed, I want to highlight some of the major milestones we've achieved. To increase brand relevance, we've spent significant resources to better understand our customers, thus generating stronger insights. This has been done both through traditional research, but also to a larger degree than ever before using data and analytics to fuel our personalization efforts, specifically online. We're constantly expanding our marketing toolbox, more precision in our targeting efforts, as well as using analytics and smart algorithms to optimize our digital marketing investments. In the last two years, we have transformed our marketing approach and are step-by-step becoming far more sophisticated. I wanted to comment on the situation in China. First of all, I'd like to iterate or reiterate that this remains a top corporate priority. The opportunity is significant and based on the research we've conducted, the Pandora proposition has every right to succeed. We are committed to fixing the fundamentals and go about this in a methodical way. As mentioned in the past, the first phase was to get a strong team in place and secondly to ensure strong operational discipline. We consider this to be in a really good place now. The next phase is to turn the strategic insights into qualified and tangible plans. Finally, it will come down to excellence in execution. Our view is that those things will materialize during 2021 and expect results to come through next year. So we're building this step by step. In terms of brand access, we accelerated the rollout of our omnichannel capabilities in Q4. So by now we have rolled out Click and Collect to over 400 concept stores in the US and UK and consider these two markets to be complete. We also rolled out Endless Isle across most other key markets. Next slide, please. As I said, Program Now has visibly improved the foundation of Pandora and will continue to do so. Taking a step back, the journey started with a shift in momentum in Q4 2019, followed by a positive like-for-like in Jan-Feb of 2020. In March, as we all know, COVID started to have a material negative impact. We quickly adapted to those challenges, and this is important. Our underlying business kept on improving. An example of this was Germany, that had a shorter lockdown than many other countries and quickly came back into positive territory. We initiated a major reorganization in the second quarter, and in a strange way, the pandemic actually forced this in place quicker than one would normally expect. We started reaping tangible benefit from this as early as in Q3, with significant improvement in sellout growth, followed by positive growth already in Q4. Next slide, please. It is clear that we're maintaining our industry-leading brand position. The evidence of the momentum continues to be manifested both in terms of unaided brand awareness as well as Google searches. On unaided awareness, we're number one in five out of seven key markets in Q4 and ranked second in the US. During our peak trading period in Q4, one third of all branded jewelry searches on Google was on Pandora, well ahead of competition that were approximately around 10%. Next slide, please. The momentum was visible in Q4 with positive sellout growth in 5 out of 7 markets as I mentioned. The only exceptions were Italy and China. Our largest market, the US, delivered a 22% sellout growth and accounted for a quarter of Pandora's total global revenue in the quarter. The strong performance was driven by heavy media investments, high product availability, successful execution of key trading events and utilization of omnichannel features, such as curbside delivery, for instance. Our next biggest market, the UK, delivered positive growth despite the lockdowns in physical stores. by leveraging strong online capabilities. Italy ended in a negative sell-out growth. In reality, the C19 restrictions had a much bigger impact than the 8% shown here, as many shops were open partially in the week, but closed during the weekends where we conduct the majority of the sales. And the 8% only includes stores closed for a full week. So with 30% of stores closed, if we count each day, and online being a relatively small business in Italy, the minus 12% sellout is easier to understand compared to the other markets. As expected, China is still underperforming in Q4 and is not expected to improve in the short term. Next slide, please. The challenge in Q4 was how to deal with the peak trading in light of the restrictions. To do this, we had prepared ourselves thoroughly. We accommodated peak traffic into physical stores through a combination of initiatives, such as virtual queues, pop-up stores and remote shopping assistance, to mention a few. We stretched peak trading periods for Black Friday and Christmas over longer time than usual through promotional tactics and media planning. We redirected traffic by promoting the online store and the omnichannel service. We doubled the online capacity that we've spoken about before, leading to a doubling or 50% up on traffic online and eventually leading to triple digit growth. The social distancing battle plan proved successful with high conversion rates and some of the initiatives will obviously continue as part of normal business going into this year. Next slide, please. In the third quarter, we talked about how we were stepping up our efforts on data-driven growth. Email marketing, for example, has historically not been a big source of revenue growth for Pandora. With the efforts that we made recently and the strengthening of our organization in this area, revenue from email marketing now contributed to a meaningful 300 million Danish kroner in Q4, which is more than double the prior year. This is a step in the right direction and there's plenty more potential in this space. Next slide, please. So let me share some of the other facts on our digital results in Q4. The page loading time was under three seconds, a 40% improvement since the start of the year. And it's a well-known fact that the speed site totally correlates with conversion rates. So we therefore continue to invest in this space. Best in class is around two seconds, which is obviously the next phase that we're looking to reach. Our online conversion rate was up 30% year-on-year, and the conversion improved for most of the steps during the customer acquisition funnel, from traffic through to sales. The most recent initiatives to improve conversion included improved size guides, 3D imaging, virtual try-on, and buy-now-pay-later with things like Klarna and Afterpay. So lots of continuous improvements leading to strong results, and we expect more in this space to come. Please turn to page 13. This is an important slide and addresses a question which I'm sure many of you have. How to interpret the plus 1% sellout growth in Q4? What's the underlying performance, you might ask? First of all, we are very satisfied about the sellout being in positive territory. That is a major milestone for Pandora given the recent years. In order to understand the performance in the quarter, it's important to look at two opposing factors resulting from the pandemic. First, the lockdowns leading to lost revenue in physical stores, with part of that recovered online. Secondly, a shift in general consumer demand away from traveling and experiences, for instance, directed instead towards, amongst others, gifting and jewelry and other discretionary purchases. When trying to assess our underlying performance, we don't have data showing what the net impact of those two factors are in Q4. We do have general market credit card data from the US, which would indicate that a temporary shift in demand was material, but clearly less than the growth Pandora delivered in the US. We unfortunately don't have similar data from other markets, but aggregated market data from various sources do indicate that Pandora overall performed better in Q4 than the market in general, which suggests that we gained market share in most of our bigger markets, except China, of course. Please turn to page 14. We are preparing ourselves for another uncertain quarter with more lockdowns. Pandora will continue to be socially responsible by creating safe environments for our store staff and for customers. A key driver of the improved sales numbers have been a better balance between driving the core and new innovations. We understand those drivers very well and remain focused on this. In addition, we also ensure that there are strong plans in place for key trading moments. In Q1, those would be Valentine's Day, Chinese New Year's and Mother's Day in the UK. The performance will to some extent depend on the impact of potential lockdowns in those countries. As always, we're planning for the worst, yet hoping for the best. Flexibility and agility will again be key, and Pandora will, to the extent possible, continue the successful initiatives from the social distancing battle plan from Q4. I will now hand it over to Anders for further dive into our numbers. Please take it away. Thank you, Alexander.

We go to slide 15. As Alexander already mentioned, then the cost savings run rate target of 1.6 billion kroner has been delivered by the end of 2020. That means there will be another 350 million kroner incremental savings cost reductions in 2021 from the savings that we have already realized during 2020. And we have decided that the cost reset team continues as part of normal business when program now comes to an end. And that's because we still see good opportunities to take out costs. But it is too early to talk about where and how much. But obviously, all of the low hanging fruits have been done already. Then if you go to slide 17, please, then that slide 17 sums up the financial performance and mostly repeats what is already being said elsewhere in the presentation. So I just want to mention two things. And the first, I want to mention that the 4% organic growth last quarter was the first quarter with positive organic growth since the fourth quarter of 2017. So the first quarter in three years with a positive organic growth. And secondly, I would like to mention that the operating working capital ended in negative by the end of last year. And that's the lowest level that we've ever seen in the company. So minus 2% of revenue was where we landed when we exited 2020. And we go to the next slide, slide 18. So let's just have a short look at the drivers between the revenue growth in Q4. First of all, the changes in the store network had a negative impact of around minus one percentage points due to AD permanent store closures. And then our selling to the wholesale partners was boosted by the phasing from the third quarter into the fourth quarter, which we also talked about back in the third quarter announcement back in November. And you will probably recall that there was an equivalent negative impact in the third quarter of 2020. And then there's a bucket here in the bridge saying 2.5% support from channel mix and other. And this comes partially from wholesale revenue converting to online revenue. especially of course in the markets impacted by lockdowns. And then it comes partially from higher freight income in our online business. And freight income is not included in the sellout, but it obviously counts as part of the overall revenue growth. And if you go to slide 19, please. The EBIT margin was quite strong in a difficult environment in the fourth quarter with headwinds both from foreign exchange, higher silver prices as well, and also some non-recurring costs. And I'll start by commenting on the second pink box, the one called non-recurring and COVID-19 costs. And this includes, among others, that we had to have or decided to have full staffing in the stores to manage the social distancing, even though revenue in the stores in the fourth quarter was down 23% compared to 19%. And then we also had some non-recurring costs related to a write-off of an old design right that we had on the books. And this goes into our cost of goods sold in the fourth quarter. So in total, there were some two percentage points margin impacts, which you can consider non-recurring in the quarter. And that means that the underlying EBIT margin was therefore roughly the same level as in the fourth quarter of 2019, excluding these non-recurring costs and excluding the headwind from foreign exchange and silver prices. And as you can also see here, we continue to reinvest our cost savings into driving the top line. And for example, we made significant investments in additional online capacity, as Alexander mentioned, and improved online customer service. And then it's also important for us to stress that the last pink box to the right, the restructuring costs, those restructuring costs under program now were completed in Q4 and there will be no further restructuring costs reported separately from 21 onwards. And then if you go to the next slide, please, slide 20. Then, as already mentioned, we generated a strong free cash flow in the fourth quarter and 2020 thereby became the second year in a row with a cash conversion above 100. And the good cash conversion is not the least result of very good progress in driving down the working capital. And within the working capital, we saw very good progress in driving receivables and day sales outstanding. And day sales outstanding for the wholesale business ended at 23 days by the end of last year. And for our entire business, including our own retail stores and online business, day sales outstanding was only 10 days by the end of last year. So we don't consider a negative operating working capital as sustainable, and we do plan, for example, to increase inventories during 2020. Having said that, there is no doubt that we have structurally improved the working capital level compared to where we were just a few years back. Then please turn to slide 22 and the financial guidance section. The first two bullets on slide 22 are important, and I'll just read out the second one. In the absence of COVID-19 impact, Pandora would guide for slightly positive organic growth in 21 versus 19. And that is an important milestone for us after almost three years of revenue decline. The problem is, of course, that 21 will be impacted by the pandemic. We don't know for how long and to what extent, but there will be an impact. There is an impact as we speak. So to be transparent in our thinking about the underlying performance and the impact and duration of COVID-19 on the reported numbers, we provide both the official guidance as well as what we think it would look like without the pandemic. And as you can see to the bottom right here on this slide, excluding COVID-19, then Pandora would have guided for organic growth above 14 and an EBIT margin of above 23. And that plus 14% number is obviously difficult to relate to because 2020 was impacted by the pandemic. But as you can see then this guidance is equivalent to a slight positive organic growth versus 2019 also. But there will be an impact from the pandemic in 2021 also, and we currently assume that the pandemic will be a six percentage points drag on revenue this year. And as you can see on the top right, this takes our official guidance on organic growth down to above 8% and an EBIT margin of above 21%. I hope this is a clear and a helpful way of framing our guidance and thinking about 2021. If we then go to the next slide, here we have spelled out our thinking about the revenue guidance in more detail. And on the top, we show how we think about the guidance versus 2020, and then at the bottom, how we think about it versus 2019. And I hope those two bridges are self-explanatory. But let me just put a few words on the key assumptions behind the guidance. We assume that an average of 25% of the fiscal stores will be temporarily closed during the first half of the year. And we are currently just around 30% of the stores being closed. And that's what drives the 6% drag on revenue for the full year and which you can see here in the second last building block on the bridge. And this impact will be seen in the first half of the year is our assumption and for the first half of the year it will be a 16% drag on revenue. And then for the second half of 2021, we do not assume any material store closures due to the pandemic, but there might be some store restrictions that will still have some limited impact on operations. And then we turn to the next slide, please. As you can see here, in the large black building block to the left, Pandora's business model still has significant positive operating leverage when revenue goes up. And we've seen that from a negative angle during the last couple of years, but it also works the other way around when revenue goes up. But in the overall EBIT margin guidance this leverage is less visible due to the expected temporary impact from the pandemic, but also from higher commodity prices. And indirectly in this bridge, you can also see that we expect to keep reinvesting the cost reset, cost reductions in driving the top line and the business. So the 350 million kroner run rate cost reductions I mentioned earlier on will be reinvested in driving the top line and not least within digital. so we're guiding for an EBIT margin above 21 and excluding the pandemic we would have guided above 23 and then capex for the year we expect to be between 1 and 1.2 billion and we don't expect any major changes to the overall store network footprint there will be some closures some openings but no major changes and then the next slide please cash distribution. We ended 2020 with a solid financial position. Our leverage was 0.5 times EBITDA, and that is in the very low end of our capital structure policy. And we expect to continue to be highly cash generative this year. And we also have ample liquidity to initiate cash distribution, as you can see in the gray box to the left here. Having said that, given the uncertainty caused by the pandemic, we think it's appropriate and prudent to await further certainty about the pandemic before initiating cash distribution. We are after all currently in a situation where only a third of our stores are fully open without any restrictions at all. But in order to get ready for a potential distribution later in 2021, later this year, we will be asking shareholders at the upcoming AGM in March to authorize us to distribute an extraordinary dividend of up to 15 kroner per share later this year. And we already have the authority to initiate a share buyback in due course from the shareholders. And with that, I will leave the word to Alexander again.