Pandora A/S Ord

Good morning, everyone, and welcome to the conference call for Pandora's Q4 results. I'm John Beckman from the Investor Relations team. I'm joined here in Copenhagen by our CEO, Alexander Lacek, and our CFO, Andrew Spoyer, and the rest of the IR team, Christoffer Malmgren and 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 kindly get back into the queue if you have additional questions. Slide two, please. Please pay notice to the disclaimer on slide 2 and then turn to slide 3. Alexander, please go ahead.

Thanks, John, and welcome everyone who is joining the call today. As you already know from our pre-release of the results in January, we had a record revenue and sell-out in Q4. We are very pleased that the growth was of high quality, broad-based, and profitable. I want to start today by expanding a bit on this. Our growth was driven by our largest platform, Moments, and by solid online performance. Moments had another strong quarter, growing 12% compared to Q4 of 2019. Online revenue nearly doubled versus 2019. The growth was also broad-based across all our key markets except China. Our largest market, U.S., continued the strong performance we've seen throughout 2021, and we're confident that Pandora continues to outperform the market in Q4. This is testimony to the operational and commercial improvements we've made in the last couple of years. The growth was also profitable, delivering a 25% EBIT margin in 2021, which is up 5 percentage points from 2020. This exceeded the guidance, and in absolute terms, EBIT was up 50% versus 2020. Q4 is by far our biggest quarter. Looking around us, we can definitely note that competitive activity is picking up as market conditions continue to stabilize. To fight this, we delivered strong profitable growth. Our model is clearly working and Pandora is well placed for future growth. Now, let's move to slide 4, please. The strong result in 2021 is the base for our guidance and for our targets. We expect to continue delivering sustainable and profitable growth. For 2022, organic growth is expected to be in the 3-6% range. Anders will soon give more detailed perspective on our assumptions behind this. EBIT margin is expected to be in the range of 25-25.5%. This is driven by top-line growth turning into operating leverage. We also reconfirm the targets from our capital markets day of 5% to 7% CAGR growth and EBIT margin of 25% to 27%. Please note two things here. First, that we reconfirm the targets despite the stronger 21 base and also note that we raised the absolute revenue target for 23 by another 2 billion kroner or 7% compared to the estimate we set out at our capital markets day. We'll also continue the distribution to our shareholders through both the proposed dividend and a new share buyback program running to February next year. Now, please turn to slide six. Before we dive into Q4, I would like to remind you of the four main building blocks in our growth strategy Phoenix. Our strategy execution is off to a strong start, which confirms the potential ahead of us. first our brand is the most widely recognized jewelry brand in the world and we will keep investing in this unique position our focus is on growing the brand penetration secondly design driving our core the moments platform is the number one priority for us and i'm happy to say that the moments continue to deliver strong growth we also want to fuel the brand with more We have relaunched Pandora ME, which outperformed the initial launch back in 2019. Pandora Brilliance, that we test-launched in the UK, is gearing up for global rollout. The third growth pillar is personalization. Here, we are improving the omnichannel experience to offer consumers a more personalized path to purchase journey. Our online channel is already seeing phenomenal performance, so the starting point is very strong. Additionally, we have started to test launch our new store concept. It's early days, but the results so far are promising. The fourth and last growth pillar is about growing our core markets. We're going to increase and optimize our network and expect to open 50 to 100 concept stores in 2022. U.S. is on track with exceptional performance in 2021, while China remains weak and we plan to reposition the brand later this year when conditions stabilize. Slide 7, please. We place sustainability at the core of our company. This is not only the right thing to do, it's also about future-proofing our business. We aim at being a low-carbon business, drive circularity principles in everything we do, and act as an example of what it means to be inclusive, diverse, and fair. Our objective is to halve carbon emissions across the full value chain by 2030, and to be a net-zero carbon business by 2040. We've taken important new steps last year by announcing climate targets, which are approved by the Science Based Target Initiative. This guarantees that our targets match our share of the reductions needed to keep global warming below 1.5°C as per the Paris Agreement. Currently, we are amongst the most ambitious in our industry. We also continued to drive circular innovation in 2021. We launched our first collection using only lab-created diamonds, and we continued our quest to use only recycled silver and gold in our jewellery by 2025. We also introduce new bags and boxes that are easier to recycle with less plastic content and a 60% lower carbon footprint. To foster an inclusive, diverse and fair culture, we have launched a comprehensive strategy addressing gender and underrepresented groups. We will not only be working within our own organization, but also evolve the way we market our products and the partners that help us bring our brand to our consumers. We are committed to continue our support of the global aid organization UNICEF. Our partnership has entered its third year and since 19, we have donated close to 6 million US dollars to this cause. Slide eight, please. Moments is our largest platform and was our key growth driver in Q4, delivering 12% sell-out growth versus 19. The Moments Christmas collection was very well received by our customers. We keep innovating Moments to activate the platform and generate solid outcomes. Last quarter, we told you how Moments wearing occasions, such as key rings and bag holders, draw incremental revenue. In Q4, we tested engraving in selected stores across Italy, US, and Canada. In Italy, we also tested online engraving with very good results. I would also want to highlight Timeless, our second largest core platform, which delivered 4 billion in revenue in 21, up almost a billion from prior year. Next slide, please. Quarter four was the first key consumption period for Brilliance since we launched in UK in May of last year. Before Q4, Brilliance had been positioned as a self-purchase targeted at millennials only. We slightly shifted our marketing activities towards gifting, which gave us very encouraging results. As we have said before, the UK pilot was about getting insights to sharpen a further rollout. We've reached a high single-digit market share of the lab-created diamond market. This is encouraging for the future rollout. In 2022, we will start the sequential global rollout, and we will tell you more about this closer to the launch date. Next slide, please. The relaunch of Pandora Me attracted very large interest in social media, and so far, after only one quarter, we see that Pandora Me is off to a promising start. First, the relaunch outperformed the initial launch back in 2019. Share of revenue doubled in Q4 compared to 2020. The growth was propelled on one hand by an influx of new customers, roughly one-third, On the other hand, we saw a fair amount of lapsed users come back to add more Pandora jewelry to their collections. Age profiles differed across markets. During the Christmas period, we experienced a high level of claimed gifting, which may suggest parents buying to their children. We will need a few more quarters to understand the exact impact on our core target, the Gen Zs. Midterm, we continue to target a minimum 5% share of business from PandoraMe. Next slide, please. Now, let's have a look at our core markets. As I've said, we're happy to see broad-based growth in Q4. Our key European markets continued a strong performance in Q4, even though COVID-19 escalated during the quarter. Combined, our key European markets delivered 10% sell-out growth in Q4 versus 2019. Germany and Italy more than doubled online revenues. Australia started Q4 with around 30% store closures and improved gradually through the quarter. We know that there's a lot of interest in what happens to revenue growth in 2022 due to the very strong growth in the US last year. Therefore, we'll share a brief insight into Jan trading. So organic growth in Jan was 23%. You should remember, though, that we had 30% of our stores closed prior year, so it's an easier comp. And growth in January should be above the fiscal year guidance for 2022. But we're happy with the start of the year, and trading in January is obviously supporting that Pandora is back on the growth track. Next slide, please. Our largest market U.S. continued the strong growth in Q4 and had exceptional performance throughout 21. The strong performance in U.S. actually started well before 21 and before the stimulus packs. Importantly, when comparing to external market data, such as MasterCard spending pulse, we see that Pandora outgrew the market in 21. The jewelry market has historically grown 3% per year. In 21, it grew 35 to 40% versus 19 and Pandora grew 51%. So we outgrew the market by 10 to 15 points. This is a testimony to the efforts and investments we've made over the last couple of years, both on the commercial and operational side. We are confident that Panova will continue to outperform the market in US also in 22. Our long-term ambition is to double the US business versus 2019, and 2021 certainly gave us a head start. Next slide, please. Our business in China remains challenged, and the growth continued to be negative. It is probably noteworthy that China only represented 2% of our quarter for revenue, therefore having a very marginal impact on group numbers. The traffic continued to be significantly impacted by COVID-19 restrictions, even though stores were formally open. Therefore, we further delayed the planned investment in repositioning the brand in China into 2022. The good news is that Pandora was the largest brand in fashion jewelry on Tmall for the first time since entering China. We continue to see significant opportunities for Pandora to grow in China. Next slide, please. The record revenue in Q4 was supported by strong marketing investment. We spent over 16% on marketing in Q4. This level is a touch higher than the 13% to 15% we've spoken about before. The reason in Q4 was that we put some extra firepower behind the Pandorami launch while ensuring strong support for the base business. Once new initiatives like Pandorami reach more of a steady state, marketing investment should come in line with the going levels. Given the high gross margin levels, return on investment is very good, even at slightly elevated investment ratios. It's clear that our efforts in marketing are paying off and our brand momentum is strong. This continues to be the driving force of revenue growth, which in turn drives EBIT margin. For unaided awareness, our leading as well as relative position remains intact. In Q4, we maintain our number one position in five out of seven markets. As we spoke about in the Q3 release, there seems to be an industry decline during COVID. We can only speculate about the reasons for this, but the restrictions around physical retail and the consequent traffic declines paired with generally lower category advertising spend are likely drivers. As you know, we use search volume as a proxy for initial customer engagement. Our global share of search was close to 30% of the Google searches for branded jewelry. Pandora ranked number one in share of search in six out of six key markets. This is roughly three times the next closest competitor. These results come at the back of a strong creatives as well as an agile approach to keep content fresh and relevant. Overall, we continue to stay top of mind as well as engaging with our consumer base. It's clear that as conditions have continued to normalize, we see more activity around us. But the investments we've made during the pandemic, especially in our internal capabilities, will continue to cement our leading position. Next slide, please. Before I hand it over to Anders, I want to comment on our digital results. We have a strong digital foundation and the investments in digital continue to drive growth. our online revenue almost doubled versus 2019. As expected, it was down versus Q4 2020 when more stores were temporarily closed. We keep investing in digital, and in Q4 we tested online engraving in Italy, which saw a 7% share of online revenue from only four items. We continue to expand our omnichannel features. As an example, last quarter we rolled out Click and Collect in Australia. In US, the Click and Collect share of online revenue was 21% in December, while in Australia it reached 26%. Very strong numbers proving Pandora has the right model to cater for our customer needs. Now, I'll hand it over to Anders to take you a bit more in detail through the numbers.

Thank you, Alexander. Please go to slide 17. You already heard about that we set record-breaking revenue and had a solid EBIT margin in Q4. So on this slide, I'll rather focus on a couple of the other financial highlights. Our gross margin was unchanged versus Q4 of last year, just around 76%. And that's despite an 80 basis point drag from higher commodity prices and foreign exchange rates. And we managed to offset that drag through a combination of lower discounts or higher net prices, cost efficiencies and leverage. On the net working capital, we entered the year at minus 5%. It's actually better than what we had expected and it's now the third year in a row with negative net working capital. This year in 2022 we do plan to continue to build inventory to mitigate potential disruptions in the supply chain and this will pull the net working capital closer to the zero mark. It's also worth noting that our leverage is still very low despite the shareholder cash returns we've made in 2021. And as you know, over the last couple of years, we have reduced the net working capital by around 3 billion kroner or so, and the lease liabilities have decreased by around 1 billion kroner. And these two factors have combined decreased leverage by around 0.5 times EBITDA, and it contributes to that we ended at only 0.4 times EBITDA by the end of 2021. And in this connection, I want to highlight the legal limitation on financial leverage in Pandora. Capital distribution to shareholders are by law limited to the free reserves in the parent company. And that's not new. And the free reserves by the end of last year amounted to 7.5 billion kroner in the parent company. And when you combine that with the lower net working capital and our asset-like business model, it currently impacts the possibility to increase leverage into the upper part of the leverage range, saying above one times EBITDA in leverage. It doesn't change that we are highly cash-generative business and we are able to continue a very competitive distribution to the shareholders every year. It's just that there are certain restrictions on increasing the leverage. Finally, I would like to highlight that our ROIC return on invested capital was 59% in 2021 and that the full year earnings per share doubled compared to 2020. Then let's go to slide 18 and the revenue bridges. These are the bridges for the quarter for Q4. In the top bridge, we are comparing to the clean base back in 2019. without any pandemic impact. And in the lower bridge, it's a year-over-year bridge. And essentially, both bridges are telling the same story, being that Pandora is growing and that the major growth driver is sellout. And the story is not much longer than that, really. But there's two of the smaller buckets I just wanted to comment on today. And there's a box called Takeovers with one point of impact, both versus 19 and versus 20. And that impact is stores where they have taken them over, typically at the end of the franchise contract, with no payment of goodwill and then afterwards we continue operating them directly in Pandora. That's the same as opening up new stores and it counts in organic growth. And the other bucket I wanted to comment on is network expansion. That's the first building block in the bridges. It shows a net zero impact versus last year. This is an area where you will see a change here this year in 2022 as we start tapping into that network expansion opportunity, the wide space we have around the world. And then please go to slide 19. And here we're showing the EBIT margin bridge and the key message is that on this slide is what they've shown in the dotted box in the middle of the bridge. And first of all, our operating leverage is unchanged and it still sits there in the Q4 EBIT margin. But as Alexander mentioned, in this quarter we have invested extra in the brand, in media, and deliberately increased our marketing spend to stay on top of mind with consumers in a competitive fourth quarter. And therefore the underlying EBIT margin is flat-ish versus last year, versus Q4 of 2020. Now, let's go to the guidance on slide 21. There are a number of comments I want to make on this slide. The first point is that With our growth guidance for 2022 and combining that with the reconfirmation of our growth target back from the capital market day, we are sending a couple of signals today that we firmly believe that Pandora is back on a growth track. Now on the 22 guidance and the 3 to 6% organic growth, where we end up in that range depends to a large extent on the US market as well as the potential impact from COVID-19 this year. And we know that especially the US can make it hard to interpret the guidance for 22 and we have therefore added a table here at the bottom showing how to think about the guidance. And in the lower end of the range of the guidance, the three points of growth, we have assumed a low single-digit negative impact from COVID-19 on trading specifically in this year. For the U.S., we expect in the lower end of the guidance that the general overall U.S. jewelry market will decline by up to 20%. So basically going down to the historical trend line that you saw on the graph that Alexander went through. While we will continue to outgrow the market in 2022 and growth in Pandora US is expected to be negative mid to high single digits in the low end of our guidance range. In the top end of the range, to the right of that box below the bridge, we assume no to limited negative impact from the pandemic on the trading this year. For the U.S., we still expect the overall U.S. jewelry market to decline. Let's call that around 10 points down, while Pandora U.S. will deliver around flat organic growth in 2022. In both scenarios, we expect the rest of the world, so everything outside of the U.S., to deliver positive high single-digit organic growth. And just for clarification, that growth number in the rest of the world, that includes the tailwind from the pandemic impact that we had last year in 2021. So that sits within that high single-digit growth number. All of this is obviously directional, indicative only. There's many ways to deliver on this guidance, there's many ways to roam, but hopefully it gives you a flavor of our thinking about the performance for this year. There's a couple of important messages to take away from this slide 21. First of all, we expect to keep growing the top line, even though the biggest market, the US, may be temporarily declining after a really strong 2021. Secondly, we want to stress that no matter what happens to the underlying overall jewelry market in the US, we expect to grow faster than that, like we have done for the last several quarters. And last but not least, it should be recalled that even though the US may be declining mid to high single-digit in 2022, it still corresponds to a low to mid-teens CAGR versus 2019. So, on the EBIT margin, next slide, 2022, we've gone for an EBIT margin of between 25 and 25.5. And in this range, there's still an underlying operating leverage. But as we sit back at the capital market day, There will be some silver price headwind in 2022, which keeps the EBIT margin expansion down this year. And next year in 2023, the upper right rating lever should also be more visible in the reported EBIT margin. There is a lot of debate in the media about cost inflation. And in general, we are not that exposed to inflationary pressure across the P&L. There is, of course, something on freight, as an example, and also in pockets of employee costs. But we expect that continued cost savings will mitigate that inflationary pressure. And that's why you don't see that as a separate negative building block on the bridge on this slide. Then moving on to slide 23, let's have a look at what we communicated back at the Capital Market Day in September and how we look at it now. First of all, as Alexander said, we are pleased to reconfirm the 5-7% organic growth CAGR for 2022 and 2023. And we reconfirmed the growth target despite the fact that the base in 2021 revenue ended much stronger than expected. So as Alexander also mentioned, it means that today we raised the absolute revenue target for 2023 to between 27 and 28.1 billion kroner as you can see to the right in the bridge here. And that's an increase of 2 billion kroner or 7% compared to the old target. We also reconfirmed the EBIT margin range of 25 to 27% next year in 2023 and where we end in that range is mainly driven by operating leverage and the silver prices and then to some extent the foreign exchange rate levels also. On slide 24, we went back to the capital market day presentation in September and then we picked up this slide again. because we wanted to talk about earnings per share for a second. At the Capital Market Day, we said that earnings per share is set to grow in the high teams in 2022 and in 2023. And we wanted to repeat that message today. We ended 2021 at an EPS of 42 kroner. And then you can calculate that our target means that we will be approaching 60 kroner earnings per share in 2023, so next year. And that's what we've illustrated to the right on this slide. Then, racing to my final slide, cash distribution on slide 25. As Alexandra mentioned up front, we are continuing the cash distribution to our shareholders. And we have ample liquidity at low leverage, and the board proposed a 16-kroner per share dividend in 2023, and that's equivalent to the 2% yield based on the share price at the end of last year and in line with our capital allocation guideline that we communicated at the CMD. On top here, we also announced a new share buyback program amounting to 3.3 billion kroner, which will run from today until early February next year. And all in all, this amounts to around 7% cash distribution of the current market cap. And with that, I'll leave it to Alexander.