Pandora A/S Ord

Good morning, everyone, and welcome to the conference call for Pandora's Q3 results. I am John Beckman from the Investor Relations team. I'm here with our CEO, Alexander Lacek, and our CFO, Andres Boyer, and the IR team, Christoffer Malmgren, and our new member, Adam Fugelsang. 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 additional questions. Slide two, please. Please pay notice to the disclaimer on slide two. And then turn to slide three. Alexander, please go ahead.

Thanks, John. And welcome everyone for joining the call with us this morning. I wanted to open this by saying that we're very pleased with not just the strong numbers per se, but importantly that they have come through with high quality. And let me highlight a few facts to support this right up front. Like we have done in the last few quarters, we are comparing our performance versus 2019, as this represents a cleaner base without COVID implications. First of all, we delivered strong 9% sell-out growth versus 2019. This pulled through an EBIT margin above 20%, clearly demonstrating our operating leverage. Moments, our biggest platform, and the core of Pandora grew by 11%. This is particularly pleasing as we have said all along that this platform continues to be vital and offers good growth prospects. From a geographical standpoint, we really have three quite different pictures. First, The US jewelry market continued to grow at an unusually high rate, supported by stimulus programs. Importantly though, Pandora continues to grow at an even higher clip, like we have done for the last couple of quarters. On that basis, we continue to believe that we are gaining market share. Secondly, Asia-Pacific has been strongly affected by COVID-related issues. In particular, China and Australia has dampened our group results in the quarter. Thirdly, we have recorded a very strong rebound in our European markets, delivering an 11% sell-out growth in the quarter. This is particularly pleasing as it has been done with significantly less price promotions, i.e. driving full price sale, a true quality mark. Looking around us, we can definitely note that the competitive activity is picking up as market conditions stabilize. Despite this, we deliver strong growth. our model is working now let's move to slide four please as a consequence of the strong results and an updated forecast for the rest of the year we upgraded our financial guidance for both organic growth and ebit margin in 21 on the 1st of november organic growth is now expected to be in the 18 to 20 range driven by better performance This equals a 5% to 7% organic growth rate versus 2019. Anders will give more detailed perspective on our assumptions in just a minute. EBIT margin is now expected to be in the range of 24% to 24.5%. This is driven by the higher expected growth rate turning into higher operating leverage. We're also continuing the distribution to our shareholders through both the ongoing share buyback program running to February and a third extraordinary dividend for 2021. Slide six, please. Before we dive into quarter three, I would like to take a step back and repeat our longer term view. At our capital markets day in September, we unfolded Pandora's new growth strategy called Phoenix. I would like to recap four key messages underpinning the direction towards 26. First, the new strategy is an evolution rather than a revolution. Our model is working, therefore we'll keep on developing this rather than venturing into new and risky territory. Secondly, our objective is to drive a balanced top and bottom line growth. We want our valuation to develop in a more predictable and balanced fashion. Thirdly, we will seek to leverage our core assets, namely our strong global brand awareness, our widespread global distribution network, and our industry-leading manufacturing capabilities. Finally, we see a strong growth potential within our core, both in terms of staying focused on the jewelry market, as well as in countries where we are already established. Next page, please. Here, we are illustrating the investment case in more detail. there's a few key messages I'd like to pull out. First of all, to the far left, the strategy is, as I just mentioned, built on our existing core assets. That's important because we're building on a strong foundation and it drives operating leverage and EBIT margin expansion. In the middle, we list the drivers for value creation from Phoenix and our 2023 targets. The gross list of growth opportunities is rich, and we don't necessarily need to land all of them in order to reach our goals. On the right part of the slide, we list more growth avenues beyond Phoenix. When we developed the strategy, it quickly became quite clear that we see more growth opportunities than what we can handle during the next few years, even though some of these opportunities are quite obvious. like getting a stronger foothold in India or Japan. It's simply a question of prioritization. That's, of course, a pretty good situation to be in. Slide 8, please. When it comes to sustainability, we continue to invest in and future-proof our business. In September, we announced the ambition to reduce carbon emissions across the entire value chain by 50% by 2030. This target has been approved by the Science-Based Target Initiative It places us, as far as we can tell, among the most climate-ambitious companies in our industry. As the meeting in Glasgow is so clearly underlining these days, our society needs to show real action faster. We are determined to do our part and lead in our industry. We have a full strategic sustainability agenda as part of Phoenix to become low-carbon, circular and inclusive. It's not only the right thing to do, it will also future-proof our business that we believe will be appreciated by consumers, employees, financial community, and other important stakeholders. Next slide, please. To drive the core is a key pillar in our strategy and our number one priority. The Moment platform is our core, representing roughly 70% of our business. In the third quarter, we launched Moment's wearing occasions, a collection of key rings and bag holders. The collection did two things for us. First, it helped re-engage existing customers with the brand by showing new, innovative ways to engage with our charms. Secondly, it drove an incremental 2% revenue in quarter three and supported the strong moments performance. It's very clear that we can continue to activate the platform and generate solid outcomes. The moments platform saw sellout growth of 11% in quarter three, as I just said. Next slide, please. The second strategic priority is to fuel the Pandora brand with more concept platforms next two moments. Pandora Brilliance is our first lab-created diamond collection. We launched Brilliance in UK back in May. Part of the reason for a test instead of an immediate global rollout was to learn and sharpen our go-to-market toolbox. It's a new segment for Padua for many aspects, and we needed to verify as well as gain important insights before considering a further geographical expansion. Based on the learnings to date, we are confident that we have generated sufficient insights for a successful rollout. I'm therefore happy to announce today that we will initiate a further sequential global rollout starting next year. This is an important milestone for the brand as it opens up for larger addressable markets. We will not rush into this, but successfully build that proposition to serve this segment with exciting offerings. For competitive reasons, country details will only be shared closer to the launch date, so please stay tuned. Our aim is to establish Brilliance as a new platform to democratize diamonds. Diamonds are not just forever. They're also for everyone. Next slide, please. Our largest market, U.S., continued its outstanding performance. This was the third quarter in a row with sellout growth above 50% compared to 2019. While this growth has been fueled by stimulus packs, it's important to note that the external data suggests that we are growing more than the market. Furthermore, 98% of revenue in the US was full price sales in Q3, as we continued to decrease promotional activity. And across our key markets, we continue to have a lower promotion level. And in Q3, we had less promo days in both physical stores and online versus 19, as illustrated to the right on the chart. Next slide, please. We continue to see our performance being impacted by COVID-19. China saw sequential deterioration. As we told you already in Q2, this is mainly due to COVID-19. Stores were formally open, but traffic was down 70% versus 19, and around 80% of our stores in China were somehow impacted by COVID-19. Therefore, as we told you about at the CMD, we delayed the planned investment in repositioning the brand in China. The good news is that Pandora was the number one brand on Tmall in fashion jewelry, a recent development. Australia was also severely impacted by COVID-19, with roughly half of the stores temporarily closed during the quarter. Stores in Australia are now back to being almost fully open again, and I'm happy to say that that has led into positive territory after the reopening. Next slide, please. Our key European markets saw a strong rebound as stores opened up in Q3 and delivered a sellout growth of 11% versus 2019. UK, Italy and Germany all returned to positive growth, where Italy and Germany also delivered positive sellout growth versus 19 physical stores. France was impacted both by promo detox and COVID-19 restrictions. Overall for the group, sell-out growth versus 2019 was 9% in the quarter, driven by the strong rebound in Europe and continued strong growth in the U.S., while as mentioned, dragged down by China, Australia, and other Asian markets that were heavily impacted by external factors, i.e. COVID-19. Next slide, please. We've kept investing in marketing and more holistic communication. This is paying off. Our brand momentum is strong. This continues to be the driving force of revenue growth, which obviously then drives EBIT margin. In terms of unaided awareness, we note three points. There seems to be an industry decline during the COVID period. We can only speculate about the reasons for this, but the restrictions around physical retail and the consequent traffic declines paired with lower advertising spend are likely drivers. Secondly, there is a certain short-term volatility in the quarterly metrics. However, we note a stable annual trend for Pandora. It was 36.6 in 2019, 36.4 in 2020. Obviously, 21 full year is not yet available. Last point, while we note a decline in the quarter, it's in line with the general trend. Therefore, relative and leading performance remains intact. In Q3, we maintain a leading position in five of seven key markets. In terms of our global share of search, more than 30% of the Google searches for branded jewelry is for Pandora. We notice slight decline in the quarter, which likely is driven by lower promotional pressure leading to less search. Net. We continue to stay top of mind as well as engaging with our consumer base. It's clear that as conditions have started to normalize, we see more competitive activity. There is no doubt that the investments we made during the pandemic will continue to cement our leading position. Next slide, please. Our investments into digital continue to generate strong results in the quarter. Digital plays a key role in our new strategy, both as a foundation as well as a distinct growth pillar. Our online revenue almost doubled versus 2019. In most countries, our e-store is the largest portal to the brand. So the investment in e-commerce also drives Halo onto the brand. Our new digital organization delivers constant improvements to the customer experience. Tangibly, we note that online conversion continues to improve and was up by 50% versus 2019. We continue to expand our omni-channel features where and when it makes sense due to COVID-19. There's a very strong consumer interest in, for instance, click and collect in the US. That made up 15% of our U.S. online sales in Q3. Recently, we rolled out Click and Collect in France, Italy, Germany, and Australia. We now have Click and Collect in 95% of our concept stores in our key markets. Next slide, please. Before I hand over to Anders, I want to give an update on the situation for our staff and production in Thailand. The COVID-19 outbreaks there escalated during late summer and the situation became more challenging and required significant mitigating actions. 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've taken a broad range of precautionary measures. You may recall that we hired additional staff already in Q2, as well as increasing our inventory position. We continued to increase stock levels in Q3, as well as hiring of additional temporary staff to offset the people stuck in quarantine and other issues around COVID. We enclosed dialogue and cooperation with the Thai authorities, and we're also closely monitoring and supporting our suppliers. Our production was affected, but we managed to keep the disruption such that it did not have any significant impact on our ability to meet demand. This is a major achievement given the circumstances. I'd like to sincerely thank our colleagues in Thailand for the tremendous effort and personal contributions to mitigate the risks during very challenging times. Now, I'll hand it over to Anders to take us a bit more through the numbers.

Thank you, Alexander. I'll go to slide 18 then. As you have heard already from Alexander, the solid revenue growth continued in the third quarter and this is also visible in a strong EBIT margin in the third quarter. So I'll just give a couple of other financial highlights here. First of all, on the gross margin, the gross margin is down 260 basis points versus third quarter of last year, but it's important to know that the underlying gross margin is in fact unchanged and remains strong. The decline that we see versus last year is driven by higher silver prices and driven by one-off costs related to fighting the pandemic in Thailand, as well as that we do have a bit of one-off costs related to expensive inventory taking over in connection with forward integration. And we didn't have any of that in the third quarter of 2020. Secondly, it's worth noting that our Networking capital continues to be around zero, despite that we are building up inventory for the peak season here in the fourth quarter. And it's also worth highlighting that our leverage is still in the very low end of the capital structure, range 0.5, despite the cash returns we have made so far. The leverage is expected to tick up a little bit in the months to come, due to the relatively high level of share buyback that we are running at the moment. The level still leaves room for continued future cash distribution to our shareholders. Finally, on this slide, I just want to highlight the 48% return on invested capital ROIC, and this is significantly above the levels that we saw both in 2020 and 2019, and partly due to higher top-line and bottom-line growth, but also partly due to the that the program now restructuring costs are now history. So next slide, please, slide 19. Here we'll have a look at the revenue development. There's two bridges here. And in the top bridge, we are comparing to a clean base in 19 without COVID-19 impact. And it is quite clear that the company is growing and sell-out and growth and organic growth are both 9% here in the third quarter. The bucket that we are calling normalization of selling that includes the impact of the so-called commercial reset that we were running back in 2019 where we deliberately reduced inventories in the franchise partner channel. In the bridge below where we compared to last year 2020 then there are some quite clear impacts from COVID-19 that may require a little bit of explanation, just like back in the second quarter announcement. First of all, sell-out growth is lower than organic growth, just like we saw in the second quarter of this year as well. So the 6% bucket that we are calling normalization of sell-in and Q4 stock build, that illustrates the effect that pandemic had last year. because last year it lowered sell-in as uncertainty was obviously quite high and our partners were more cautious with building inventory ahead of the Q4 peak season. This year is back to normal behavior and it drives up organic growth above sell-out by six points when we compare on a year-over-year basis. And in the same way, other points of sale were very hard hit in the third quarter of last year but have recovered strongly this year and the third quarter of this year. And this has happened partly by moving revenue from our online business and into other point of sales. And the performances in other points of sales is not included in the sell-out KPI. And therefore, that also adds four points of difference between sell-out and organic growth in the third quarter. And it's exactly the same effect as we saw back in the last quarter in Q2. So next slide, please, slide 20 on the EBIT margin. Our EBIT margin in the third quarter was 20.2, up three points versus last year, and the main driver of this continued to be operating leverage, as Alexander also mentioned. And this margin expansion was delivered despite that we received significantly less government support and less rent concessions this year, and despite that we also incurred actually quite some extraordinary cost to mitigate the pandemic in Thailand. And that's the first two pink boxes in the waterfall on this slide. On the other hand, there's also some positive impact from facing of operating expenses and some temporary savings from actually quite unusual high stall vacancies here in the third quarter and a part of this is expected to reverse in the fourth quarter. Then I'll go to slide 22 and the upgraded guidance. And first here we are bridging from the 2020 revenue to the new guidance of 18 to 20% organic growth and then onwards to the 21 revenue in absolute numbers. Where we will be landing in this 18 to 20% range is not least depending on the level of US revenue here in Q4. And as usual, it's also to be recalled that even though we have only nine weeks left of the year, it is nine big weeks. And those nine weeks that we have left of the year are not far from a third of the setup for the full year. So we are, as usual, moving into peak season. I'd also like just to repeat our three COVID-19 assumptions for the guidance. First of all, we still assume that around 5% of the stores will be temporarily closed or severely impacted by COVID-19 in Q4. And secondly, the guidance assumes that there will be no new COVID-19 restrictions implemented which impact consumer behavior significantly in one way or the other. And finally, the assumption is that there will be no major disruptions in the supply chain. And then finally, I just want to highlight that the new guidance of 18% to 20% growth versus last year corresponds to 5% to 7% organic growth on a two-year stack. Then next slide, please. Slide 23 on the EBIT margin. And in this EBIT margin, we are building all the way back from the EBIT margin last year through the old guidance and then on to the new guidance. And as you can see in the right part of the bridge, the increased EBIT margin guidance is driven by operating leverage, a bit lower investment in China this year, and then partly offset by the cost of mitigating the pandemic in Thailand. And I would assume that this is quite straightforward. So on this slide, I will just mention the two other changes to the guidance parameters that we made the day before yesterday and that includes a slightly lower capex and that the net store closures ends in the low end of the previous guidance range and just to avoid misunderstandings and let me be very clear that the lower capex is not a reflection of any kind of uncertainty about the strategy or similar it's mainly a reflection of the pandemic and the natural postponement of certain investments as a consequence of that, including in Thailand. And then we also want to repeat that the store closes that we are doing this year is just normal ongoing optimization of the network, and it includes the deliberate delay in new store openings in China. And just repeating, what we communicated at the CMD, we do see ample white space around the world and ample opportunity to expand the network in the years to come. On slide 24, we'll have a look at what the full year guidance implies for the fourth quarter in terms of revenue growth on a two year stack versus 19. And the guidance versus 2020 of 18 to 20% growth corresponds to five to seven on a two year stack. And that's the number you can see in the last black box to the right. And then the implied organic growth, specifically for Q4, is 2-7% organic growth, and that's the box in the middle. So, with our guidance, we confirmed that we see that Pandora is back on a growth track in Q4, and that is despite that we have a stronger comparison base in Q4 of 19, where the impact from the program now started becoming more visible. As you may remember then, in the third quarter of 2019, organic growth was minus 14, and then in Q4 of 2019, the organic growth improved sequentially to almost flat, or minus 1 to be precise. So the comparison base on a two-year stack actually becomes quite much tougher, and the 2-7% implied guidance should be seen in that context. And then you may say that the implied five-point range in Q4 is quite wide for a quarter where we are already almost in the middle of it or at least well into the Q4. But we are giving this range due both to the uncertainty related to pandemic as well as an elevated range of possible outcomes for the US performance in this quarter. And then slide 25, and last slide from me, as Alexander mentioned upfront, we are continuing the cash distribution. We have ample liquidity, we have a low leverage, and we will distribute another 500 million kroner in dividends in roughly two weeks from now. And that will be the third extraordinary dividend for this year. This takes the total distribution to shareholders from both dividends and buybacks to 5.5 billion Danish kroner between May 21 and early February next year. And that's close to 7% of our market cap. And with that, I'll hand it back to Alexander and slide 27, please.