Pandora A/S Ord

Good morning, everyone, and welcome to the conference call for Pandora's Q2 results. I am John Beckman from the Investor Relations team. I'm here with our CEO, Alexander Lacek, our CFO, Andres Boyer, and the rest of the IR team, Christoffer Malmgren and Mikkel Johansson. There will be a Q&A session at the end of the call. As usual, please limit yourself to two questions at a time and get back into the queue if you have additional questions. Slide two, please. Please pay notice to the disclaimer on slide two. And then turn to slide three. Alexander, please go ahead.

Thank you, John, and welcome everyone who are joining us in this call today. As you will have seen from our guidance upgrade, the strong momentum continued in the second quarter. In fact, a record revenue quarter for Pandora. We are moving from strength to strength. During the pandemic, we have stayed focused on rebuilding our company and invested for the long term. We have maintained a high marketing investment, continued to bring exciting product innovation, continued to invest in our digital capabilities, as well as strengthening our organization. We have laid a very strong foundation for the new strategy, called Phoenix. We will review this new program in great detail in the upcoming Virtual Capital Markets Day on September 14. Let's now drill a bit deeper into the second quarter. As you will see in the presentation, we continue to discuss our performance versus 2019, as this represents a cleaner base without impact from COVID-19. In the second quarter, sell-out growth versus 19 was plus 7%. We are very pleased with this result, as yet again we confirm playing in positive comp territory. The strong performance in the US continued, with unusually high market growth, that I will come back to. In our key European markets, we saw clear and sequential improvement when our stores started reopening. The strong growth lifted our EBIT margin above 25% in the second quarter, demonstrating the operating leverage in our business model. All in all, a very strong quarter for the company given the external circumstances. Now, let's move to slide four, please. As a consequence of the strong results and an updated full-year forecast, we upgraded our financial guidance for both organic growth and EBIT margin in 2021 on August 6. Organic growth is now expected to be in the 16-18% range, driven by better underlying performance and a revised forecast. This is equal to a 3-5% organic growth rate versus 2019. Anders will shortly give more perspective on our assumptions and corresponding numbers. EBIT margin is now expected to be in the range of 23-24%. This is driven by the higher expected growth rates turning into higher operating leverage. We'll also continue the distribution to our shareholders with a further 1 billion DKK over the next three months, split evenly between dividend and share buyback. Let's move to slide six, please. Apologies for a busy chart, but it's important to dive a bit deeper into the varying country results and the drivers thereof. Generally speaking, though, the key driver of the variance continues to be how much COVID-19 restricts our ability to operate the physical store network. Using the second quarter of 2019 as the comparison, this quarter we saw 7% sell-out growth, despite that around 15% of our stores were temporarily closed due to COVID-19. In U.S., our largest market, we continued a very high growth of 63%. It's fair to say that a market that historically has grown low single digit has been unusually benefiting from the stimulus checks. In addition to this, we have strong indications that Pandora has been building market share on top of this situation. We do expect that there will be a natural correction once the fiscal stimulus is removed. It is, however, unclear how this demand curve will be shaped. We continue to invest for strong growth in the U.S. to ensure we have momentum over and above those market dynamics. In China, we saw sequential improvement in the quarter. However, growth was still negative versus 19. Please note that in Q3, China has been impacted both by typhoons, which caused flooding in parts of the country, and new outbreaks of the Delta variant. This will be visible in the third quarter performance. In the second half of 21, we will take the first significant steps in the transformation to reposition our brand. Timing obviously depends on the recent C-19 development. It doesn't make much sense to invest heavily in media and marketing if there's little traffic in the stores. More on the opportunity in China to come at the capital markets day. UK, which is our second largest market, was up 1% versus 19%. Since the reopening, traffic started to return to stores and online's performance continues to be strong. In our key European markets, we experienced sequential improvements when stores started to open up again as restrictions eased. Slide seven, please. In May, we launched Pandora Brilliance in UK. It's our way into the diamond market. Brilliance is the first platform tested under the new Phoenix strategy with the objective to become a new sizable and important concept platform next to Moments. We're roughly 100 days into the test launch and progressing well. We're gaining important insights that are critical to sharpen a potential global launch. A decision of this will be taken later in the year. We will share more details about brilliance at the CMD as well. Next slide, please. Let's have a look at our underlying performance. As said, we think 19 is the best comparison base. There are two major and opposing factors at play here. First, there is no doubt that COVID-19 continues to impact our performance, with the lockdown of stores dragging down revenue. Some of that is obviously recovered online. Furthermore, we can also notice a slower recovery in parts of the world where governments have been more restrictive with supporting people as well as businesses. Latin America as a region is one example. Secondly, the unusually strong U.S. growth accelerated by stimulus packages. It is hard to pinpoint the net impact of those two factors. However, we are confident the underlying sellout growth versus 2019 is positive in the second quarter. Next slide, please. The strong brand momentum is the driving force of revenue growth and EBIT margin expansion. This is no surprise to us as we continuously have kept our marketing investment at a very competitive level. Our continuous advancements in digital marketing, better advertising quality, more consistent and holistic communication both on and offline pays dividends. Our global unaided awareness remains high and even increased the relative gap to competition. We maintain a leading position in five out of seven key markets. In terms of our global share of search, around one third of the Google searches for branded jewelry is for Pandora, well ahead of competition. Net, we continue to stay top of mind as well as engage with our consumer base. I expect that competitors will start to reactivate their efforts as we start moving towards more stable conditions. There is no doubt that the investment we've made during the pandemic will continue to cement our leading position. Next slide, please. Looking back, we are extremely pleased with the accelerated efforts to build out not only our digital marketing efforts, but likewise our e-commerce business. In most countries, our e-store is the largest portal to the brand. Our digital results in Q2 are very encouraging. Online revenue made up a quarter of the total in Q2. Our online revenue more than doubled versus 2019. Comparing to Q2 of last year, online was down as expected as consumers returned to stores. We continue to focus on driving full price sales across all our trading channels. Less promotional activity drove down our online discounts by six percentage points compared to the Q2 of last year. Finally, we're expanding our omnichannel features where and when it makes sense due to C19. There's a very strong consumer interest in, for instance, Click and Collect in the US. That made up 13% of our online sales in the quarter. Digital plays a key role in our new strategy, both as a foundation for the strategy and as a growth driver. But more on this to come on the upcoming CMD. Next slide, please. I want to give an update on the situation of our staff and production in Thailand since the COVID-19 outbreaks there have escalated during the last couple of months and government restrictions have increased. First of all, the health and safety of our employees comes first, always. To protect our employees and to mitigate the risk of disruptions in the supply chain, we have taken a broad range of precautionary measures. This includes regular proactive testing of all employees. If a case is detected, there is immediate quarantine of close contacts and separation, sealing and cleaning of the area where case is detected. Normally this procedure is conducted within 24 hours and then we're back up again. We are in very close dialogue and cooperation with Thai authorities, and we are closely monitoring our suppliers as well. We took a decision earlier this year to hire an additional 1,000 people into the production. One of the key reasons was that we wanted to increase our inventory position as an insurance policy against increased C-19 impacts in Thailand. It's safe to say that this was a good decision as we're now in a position where the guidance under current circumstances is safeguarded. Next slide, please. We look forward to unfolding the Phoenix strategy at our online CMD on September 14. The executive leadership team will then present how Pandora will drive long-term, sustainable, and profitable growth, building on the vast untapped opportunities within our existing business. We will be disclosing our financial targets at this time. We will make material available in advance on our website so you can digest it before the presentations begin. The CMD will be accessed via our website where you can also find additional information ahead of the event. I will now hand over to Anders to go through the financials in more detail.

Thank you, Alexander. And please go to slide 14. We are quite pleased with the financial performance in the second quarter. And that's not just on the top line and EBIT, but also on KPI, such as the gross margin, cash conversion and leverage. And as you can see here to the left on this slide our leverage was only 0.4 times by the end of the second quarter and thereby actually below our capital structure policy range. And this obviously leaves some room for future cash distribution to our shareholders. And I can't help pointing out the significant uplift in earnings per share which you can see in the last row in the table. And the fact that we have no more restructuring cost and at the same time grow the top lines gives a pretty significant uplift in EPS. And we have not shown ROIC or return on invested capital on the slide here, but the improvement would also have been very visible in ROIC if we had put it on the slide up here. ROIC ended at 44% in the second quarter and significantly up versus the last few years. So let's go to the next slide where I can explain a little bit more about the revenue development in the second quarter, slide 15. And let me start off by saying that we do know that the revenue development is not easy to understand, especially versus 2020. The impact of COVID-19 here in the second quarter is significant and can be difficult to understand. We have provided quite some detail for the same reason in the bridges here and in the company announcement and we hope that you find it useful. All right, but in the middle of all of this COVID-19 noise, the most important KPI is the number that we put in the green box, the plus 7% sellout growth versus 2019. That's a number that confirms that the company is growing and it's growing versus a clean base in 19 where we didn't have any pandemic impact. And as you can also see in the bridge in the upper part of the slide versus 19, there's a 7% bucket called normalization of sell-in and other. And that bucket includes a few things such as the commercial reset we did back in 19 as part of program now with the purpose of reducing wholesale inventory. And many of you probably... But it also includes good performance in other points of sale as well as higher online freight income. And both of these last two items is not included in sell-out growth but only included in organic growth the way that we calculated. And I would like to stress that inventories in the wholesale channel are at healthy levels and that we don't see any issues with old inventories or excess inventories going out of the quarter. So that was the easy bridge, so to speak. But in the bridge below, where we compared to the second quarter of 2020, it's a little bit more complicated. And most of the building blocks in the bridge are hopefully quite straightforward, or you recall them back from our first quarter announcement. But there is another slightly more technical, tricky building block, which is also a consequence of the pandemic situation. And that's the 7% bucket that we call shift from online to other points of sale, the plus 7% there. And that bucket includes the effect of that the lower COVID-19 impact this year leads to a shift of revenue from online last year, which is included in sellout, to other points of sale this year, which is not included in sellout. And normally when you have these shifts, that's not really an issue. But when you have shocks to the system, so to speak, like in the second quarter last year, this becomes visible in the way that the KPIs are calculated. A little bit technical, but this should be the only quarter where we have this effect of the pandemic. So if you go to the next slide, please, slide 16. Our second quarter EBIT margin was 25.2 and actually the highest second quarter level that we have delivered in three years. Contrary to the revenue bridge, I'm not going to spend much time on this slide and we'll actually go directly on to slide 18 and the upgraded guidance and put a few more words on that. On slide 18 and then subsequently on slide 19, we are bridging back from 2020 through the old guidance and into the new guidance. And this is mostly background information for modeling purposes, and there shouldn't be any big surprises here, but there are a few things that we just want to call out. And the first thing is about the pandemic assumptions behind the guidance for the rest of the year. And we assume that around 5% of the stores will be temporarily closed in the second half of the year. And that number is obviously associated with high uncertainty. But on the other hand, we need to make an assumption behind the guidance. And on August 6th, when we upgraded the guidance, around 6% of the stores were closed. Today it's around 8% of the small stores that are closed, among others China and Australia, compared to August 6th. Another C19 assumption is that we expect no major disruptions or assume no major disruptions in the supply chain in the back half of the year. You should also expect that China will remain at drag on group performance in the second half and that the third quarter will be impacted by the recent increases in COVID-19 cases, as Alexandra mentioned, as well as the flooding in July and the typhoons that we've also seen in China. And then we have been encouraged to specifically write what the guidance leads to in terms of real money, not just percentages, but the kroner. So we've added that here, as you can see in the last column, and the guidance that we have given is translating into a revenue of between 22 and 22.4 billion kroner for the full year. So if you go to the next slide, please, and the EBIT margin. As Alexander already mentioned, the higher EBIT marketing guidance is driven by operating leverage, and I think the bridge here is quite self-explanatory. So I'll just mention two other smaller changes to the guidance, which are mentioned on the slide here as well to the right and that includes a slightly lower capex and a few more store closures than what we guided previously and these additional store closures should just be seen as normal ongoing optimization of the network But we want to make clear that this does not indicate any change in our overall network strategy. We still see ample white space around the world and ample opportunity to expand the network. And we'll talk more about that at the capital market day. then a bit a few more slides on the guidance and the slide 20 and 21 we have looked at what our full year guidance implies for the second half of 21 and first on this slide we look at the implied revenue growth and the data that we're showing on this slide is versus 19. and the guidance of that we have made of versus 2020 of 16 to 18% organic growth corresponds to 3 to 5 when you look at it versus 19. And that's the number you can see in the last black box in the upper part of the slide, plus 3 to 5% organic growth. and the implied organic growth for the second half is therefore between plus two and plus five and that's the box in the middle in the upper part of the graph and then we break down that two to five percent implied second half growth in the lower part of the graph and the way that we are thinking about the guidance is that it corresponds to an underlying sell-out growth of between plus two and plus six in the second half of the year and that's the first black box to the left at the bottom of the slide and that number confirms that we do believe that Pandora is back on a growth track Compared to the 19 base, which is obviously clean of COVID-19 impact, that plus 2 to plus 6% sellout will be offset by the continued temporary store closures. driven by the pandemic. And that's the minus two to minus three that you can see in the pink box. And then when you convert it from sellout to organic growth, you should think about adding around two points. to the sell-out growth and this includes among others that we were running the commercial reset back in 2019 which reduced sell-in to wholesale partners back then. We have received quite a number of questions about whether the guidance is conservative and just a few comments on that question. As Alexander already said, we've already obviously put out the guidance there because we think it's a proper reflection of how 21 could play out. There is a lot of uncertainty coming from the pandemic, and that's not just the direct effect from lockdowns, but it's also secondary effects such as shifts in how consumers are spending their money. But it should also be clear that if the US continues at the really high growth rate that we saw in the second quarter or just something close to that, then that would be an upside to the guidance that we have put out. But let's see how that plays out. Next slide, please. For the EBIT, the guidance implies a 23% to 25% margin in the second half of the year. and there's two cuts on that margin guidance or implied margin guidance that we would like to make and first comparing with this the second half margin last year and then looking at the margin development on a sequential basis versus the first half of the year. If we start out looking at the roughly three percentage points lower margin versus the second half of last year then the big drivers of that three points lower margin in our implied guidance. That's first of all that we are starting this year in the second half the investments related to the repositioning of the brand in China. And that would be a 150 basis points, 1.5 percentage points drag on the margin in the second half of the year. Additionally, there's a 2 percentage points drag from the higher silver prices in the second half compared to last year. And that silver price impact is partly offset by a favorable foreign exchange impact. So the net silver and foreign exchange impact in the second half of the year is around half a percentage point drag versus last year. So that's one and a half points from China. half a point from FX and silver, and combined a two-point drag on the margin. And then the rest is smaller bits and pieces, but importantly including less or no government support. And you might remember from the numbers last year that we got 110 million kroner in government support last year or roughly one point of government support looking back towards last year. Then if you turn to look at the margin from a sequential point of view then the margin pick up in the second half which Pandora is usually seeing, is a bit lower in 2021 than in prior years. And the reasons for that are twofold. First of all, it's due to that the strong US growth that we have seen in the first half of this year came at very limited incremental costs and lifted the margin in the first half of the year. And secondly, as I just mentioned, it's the investment that we're doing in the repositioning of the brand in China that will be a drag on the margin here in Q3 and Q4 of this year. So another way to say it is that there's no underlying structural changes to the business model in the margins baked into this guidance. Enough about the guidance. Last slide from me on the slide 22. And as Alexander already mentioned up front, we are continuing the cash distribution. During the last three months, we have paid out a billion kroner evenly split between dividend and buybacks. And we still have ample liquidity, a very low leverage. And over the next three months, we will distribute another one billion kroner, also evenly split between dividend and buybacks. And assuming that the pandemic doesn't worsen, Pandora expects to continue cash distribution also in the fourth quarter. And with that, I'll hand it back to Alexander and slide 24.