Pandora A/S Ord

Good morning, everyone. Welcome to the conference call for Pandora's Q1 2022 results. I'm John Beckman from the Investor Relations team. I'm joined here in Copenhagen by our CEO, Alexander Lacek, and our CFO, Anders Boyer, 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 two and then turn to slide three. Alexander, please go ahead.

Thanks, John, and welcome everyone joining this call today. I'm happy to say that we've had an outstanding start to 2022 with record revenue in the first quarter. Just like we've done in the past, we also assess our underlying performance versus the last clean year, which was 2019. In this perspective, our first quarter of this year shows an 18% growth. Whichever way we look at the quarter, it's a very good result. We consider the growth to be of high quality as it's broad-based. All product platforms contributed, as did most of our core markets. Furthermore, the revenue came behind a lower discounting level, or said in another way, with a higher degree of full price revenue. Again, demonstrating the strength of our brand. The execution of our growth strategy, Phoenix, is progressing very well. The investment in our growth pillars, as well as the foundations, continue to yield strong results, visible also in the financial performance. Our business model continues to deliver an impressive profitability. In the quarter, EBIT margin landed at 23%, which is up almost 3 percentage points from 2021, equal to an EBIT growth of 45%. In spite of inflation and increasing interest rates, consumer demand generally remained healthy throughout April. It is, however, prudent to be mindful of the world around us being plagued by yet another macroevent due to the ongoing conflict in Ukraine. Furthermore, we are well aware that our comps do get tougher in the balance to go. In the first part of last year, a large part of our network was closed, as well as the strong positive impact on the U.S. category due to the stimulus checks. Nevertheless, we'll continue to invest in our business, just like we have done in the last few years, with good outcomes. We just need to ensure we are even sharper in everything we do going forward. Now, let's move to slide four, please. We have updated our guidance slightly. This is based on both the strong Q1 results as well as our updated view for the rest of the year. For the full year of 2022, organic growth is now expected to be in the 4% to 6% range, up from 3% to 6%, while EBIT margin is still expected to be in the range of 25% to 25.5%. Anders will give a more detailed perspective on our assumptions behind this. Slide 6, please. Before we dive into Q1 results, I want to give a brief update on the four main building blocks in our growth strategy, Phoenix. As I mentioned, our strategy execution is off to a strong start, which confirms the potential ahead of us. First, in the design pillar, the focus is on driving the core while also fueling the brand with more. But our moments continue to deliver strong growth, showcasing the vitality of the platform. Fueling the brand with more is well represented by, for instance, the successful new collaboration with Marvel. Second growth pillar is about growing our core markets. In US, our largest market, we completed the acquisition of 32 concept stores, mainly located on the West Coast. China remains weak, as you would probably expect, and we have decided to postpone the planned investments to reposition the brand until market conditions stabilize. We are delivering very strong growth in our other core markets, so the focused approach is working well for us. The third growth pillar is driving higher brand desire. In our most recent brand tracker study, we continue to lead in brand equity. We are number one in five out of the top seven countries. Our position among Gen Z has strengthened, which bodes well for the future. Unaided awareness remains a competitive edge. These scores are the result of our marketing as well as sales efforts across all consumer touchpoints. The fourth growth pillar is personalization. Here we are improving the omnichannel experience to offer consumers more personalized path to purchase journeys. Our online channel performance continues to be solid, so the starting point is very strong. We are investing a fair amount of effort in building a solid tech foundation on which we can implement and accelerate many of the experiences we want to offer our customers. The most recent activity is the launch of a new customer loyalty program in France, which is being rolled out nationally as we speak. Slide seven, please. Our largest platform, Moments, is and was our key driver of growth in the quarter, delivering 17% sell-out growth versus 2021. The strong result was driven both by the base portfolio and supported by new products such as the Padlock, another innovation within the Moments platform. This helped drive a very strong performance during Valentine's Day in Feb. The padlock follows the other initiatives we've told you about in previous quarters, such as key rings, bag holders, and engraving, all designed to keep moments relevant in the minds of consumers. Our collaborations delivered very strong growth of 41% in Q1. This segment was supported by a successful Marvel launch in February. The Marvel collaboration is building on Pandora's strong relationship with Disney and proved an imminent success. Marvel alone accounted for 3% share of business in the quarter and 6% since launch. So far, it has been outperforming the initial launch of both Star Wars and Harry Potter and has performed very well across key markets. Among the product heroes is the Infinity Ring, which sold out in the first two weeks. So we have over 17,000 customers now that have signed up on a waiting list, and that's a first for Pandora. Collaborations with other big brands is a way to build awareness and drive brand desirability. Marvel is designed to engage and introduce existing and new customers into the Pandora brand. Next slide, please. Besides driving the core, we also want to fuel the brand with more. Therefore, we're launching new platforms with a launch and leverage mindset. This means we're putting more support behind new initiatives than we used to do. Our relaunched Pandora ME grew 132% versus Q1 of 21 and continues to do well across key markets. There was no major marketing push specifically on Pandora ME in the quarter, though we have given it an ongoing support plan. We'll bring further innovation and products into the platform later this year. For Pandora Brilliance, we're currently gearing up to expand the geographical footprint. This is planned for later this year. We've continued to play around with the model in UK, in particular focusing on visual merchandising, distribution and assortment variations. The learnings are very valuable as we get ready for further market entries. Next slide, please. Now, let's have a look at our core markets. I'll cover US and China separately in a minute. Let's first have a look at our key European markets. They've had a phenomenal performance in Q1. UK, Italy, France, and Germany all delivered double-digit growth, both versus 2021 and 2019. You always ask me what the magic is, and the answer is always the same. Strong execution of unknown business drivers, such as clear merchandising choices, strong sales execution in our stores, great communication programs across a multitude of platforms, heavy media support, and finally, consumer-relevant initiatives. Our more established markets, UK and Italy, both delivered more than 30% organic growth versus 2019, cementing our strong brand position in these markets. Australia was flat versus 21 and 19. However, there was a negative impact from COVID-19 as travel and quarantine restrictions impacted traffic significantly. Online did well, supported by successful click and collect performance. As conditions more recently are stabilizing, we note a return to growth. Now let's have a look at our largest market on the next slide, please. U.S. continued growing in Q1 with organic growth of 7% versus 2021 and equal to 62% versus 2019. The growth in Q1 was in line with the expectations we laid out in the guidance for the year. And as we've said before, we're expecting a slowdown of the U.S. market during 2022. Looking at our market share data, this represents a 2.3 market share compared to 2.0 in 2019. So the growth is coming through in market shares. Our guidance assumption for Pandora US is unchanged. As I mentioned, we acquired 32 stores in U.S. in Q1 and five in Canada. Twenty of the stores are on the West Coast, strengthening our foothold there and enabling for further network expansion. Next slide, please. Our business in China remains challenged, and the growth continued to be significantly negative. The traffic continued to be impacted by COVID-19 restrictions, which escalated in the end of the quarter as hard lockdowns were put in place, not least in Shanghai. In Q1, we changed management in China. Irving Holmes Wong has joined us. He brings extensive experience of general management in the region, both mainland and Hong Kong. He has a proven track record of turnaround and transformation from Bacardi and Avon in mainland China, as well as L'Oreal in Hong Kong. I just wanted to reiterate that we still see significant opportunities for Pandora to grow in China. But given the difficult trading conditions, we have postponed the planned brand relaunch until market conditions stabilize, which could very well be next year. In the meantime, we continue to fine-tune our plans. Next slide, please. I wanted to address a point in relation to how many companies those days offset the inflationary pressures on the P&L by passing on the costs to the consumers. First of all, we are positioned as an affordable yet desirable jewelry brand. We serve the many rather than the few, and we take pride in offering a sharp value proposition. This is the foundation on which Pandora has been built and attracted many millions of customers over the years, and keep doing so. Going back a few years, the brand failed to offer the right value equation and had to resort to heavy discounting and frequent promotions to try and sustain the customer interest. We know all too well that this formula wasn't working. So in the last three years, we have done quite the opposite, namely made the brand more relevant through marketing, innovation, good salesmanship, efficient merchandising and strong digital presence. During this period, we have also literally halved the promotional intensity, reduced the deep discounting, thus effectively increased the full price revenue, while at the same time increased our volumes. This is clear evidence that we have a great value equation and that the brand holds meaningful pricing power. We will be very careful with maintaining our value equation. This might, however, imply that some select and careful pricing adjustments could come into play as a way to offset some of the cost price pressure. But I would like to stress that this will not come at the expense of our affordability position as seen by our customers. Net. We're not immune to inflation, but we're very clear on the perimeter in which we want to play. Next slide, please. The engagement for our brand was strong in the quarter, amongst other things supported by our new heroes from the Marvel collection. Through relevant brand content, we established ourselves as the go-to brand hub for Marvel fans. We saw record-breaking reach with 40 million impressions across social platforms, 16 million engagements in the first month after launch. Marvel alone drove twice the web and email traffic as Star Wars during the pre-launch and reached more than 1 million views on TikTok in the first 24 hours. The biggest question we're receiving from our customers is why or when Spider-Man will show up in our assortment. So I say, with great power comes great responsibility. Next slide, please. Before I hand over to Anders, I want to comment on our personalization journey, one of the key growth pillars in our strategy. Our online performance continued to be solid in Q1, more than doubling versus 19. We are hard at work to build a strong digital foundation, which is key for the omnichannel experience. In France, we test-launched our new loyalty program online and in 20 stores. In the first four weeks, 50,000 consumers signed up, We can already note an increased basket value of 8% in-store and 18% on e-com. Furthermore, we see an increased unit per transaction as well as conversion rate. Bearing in mind, though, that this data is from the last couple of weeks. Either way, it's a very inspiring start. As you know, we are a direct-to-consumer brand. More than 75% of our transactions are done direct with our customers. Owning first-party data will be the bedrock on which we will build our unique and personalized path to purchase. Given that our brand promise is built on self-expression and collectability, offering a personalized journey fits the brand particularly well. On that note, I hand over to Anders for a closer look at the numbers.

Thank you, Alexander. And then we go, please, to slide 17. I'll talk about revenue and EBIT on the following slide. So on this one, I'll just give a couple of comments on some of the other financial highlights. On the gross margin, it remained strong in Q1 of this year and almost at the same level as last year. And that's despite headwinds from commodity prices and the and a temporary drag from the forward integration that we have been doing here in the first quarter. Networking capital increased around four points versus last year as we continue building inventory to mitigate the risk of supply chain disruptions. And we do expect to increase inventories further during the rest of this year, during the rest of 2022. And this will, of course, have a temporary negative impact on cash conversion. It's also worth noting the significant increase in both return on invested capital and EPS, as you can see on the slide here. And that's driven by the combination of revenue growth and EBIT margin expansion in the quarter. Then we go to the next slide, please. The revenue performance in the quarter. Before I give a few comments to the bridge, I wanted to start out with a comment on the different revenue growth KPIs. In the past, we have usually showed both sell-out growth and organic growth in most tables and slides because each of them serve a specific purpose and they're both sort of important KPIs. But now, as you know, we are guiding on organic growth, not sell-out growth, and combining that with the fact that network expansion is a core part in our Phoenix strategy and that is not captured in sell-out. Then, in order also to simplify the communication, we now focus on organic growth in most tables and slides. But just to be clear, all the usual data are still made public, it's still available in our disclosure, so no change from that perspective. On the bridge on this slide, it's clear that Pandora keeps growing. That's quite visible in the bridge here. Sellout growth was plus 17 versus last year and the main driver of the organic growth in the quarter. Network expansion is also becoming more visible in the numbers. And as you can see in the first couple of building blocks in the bridge network expansion and takeovers of franchise stores added around three points of growth on top of the sellout and helped lift organic growth to 21%. Forward integration also supported revenue growth by just around one point, and this is in the quarter. This is mainly in the US. And then finally, to get to the total reported revenue growth of 26%, we had foreign exchange tailwind of around four points, and that's mainly from a stronger US dollar. And then we go to the next slide. This is the EBIT margin bridge. And the key message on this slide is that what we have shown in the dotted box in the middle part of the bridge illustrating the improvement in the underlying EBIT margin from Q1 last year to Q1 of this year. And first of all, our operating leverage was quite strong, as you can see within the dotted box here, contributing over five points to the EBIT margin. And then there was a further two points coming from efficiency gains at gross margin level, as we had lower promotions, as Alexander said, but also lower production costs per unit and a favorable channel mix. And then to the left of the dotted box and to the right of the dotted box, we have isolated various temporary effects. And if you look at the elements to the right, so the temporary effects this year, there were three things pulling down the EBIT margin in Q1. First of all, that's the precautionary measures in Thailand that we continue to take due to COVID-19. Secondly, we made a provision for the full trade receivables towards the Russian distributor. And as you know, we suspended all business with Russia and Belarus on February 24. And we have instructed our suppliers that we will not accept any type of direct or indirect sourcing from Russia or Belarus. And on top of the last, the third point dragging down the EBIT margin in Q1 was a temporary drag from forward integration as we are buying back inventory at wholesale value. And then let's go two slides down to slide 21 and the guidance. As Alexander already mentioned, we have updated our organic growth guidance to four to six from three to six before. And on the surface, that's obviously a smaller adjustment, but underneath there are some changes in the assumptions compared to the original guidance back from February. First of all, our Q1 performance was good, and another data point that Pandora is back on a sustainable growth track. And that would, all things equal, have led us to upgrade the guidance for 2022. But as you know, during the quarter, the business environment changed quite considerably and increasing the risk for 22 compared to the original guidance. There's negative impacts from the war, cost inflation, potential impact on consumer demand due to inflation and higher interest rates and as well as some COVID-19 impact and all of that adding up. pressure to the rest of 22. But net-net, and despite these sources of uncertainty, we have lifted the bottom of the growth guidance. And in a business environment like this, you either need to guide with a wide range, a very wide range, or alternatively, you make certain assumptions about the business environment and then you guide within that. And we've done the latter and made a number of assumptions about the business environment. And you can see these assumptions here in the table on the bottom right. And I want you to stress that you should see these assumptions as directional and indicative only. And then we go to the next slide, please, the EBIT margin guidance. And even though the EBIT margin guidance is unchanged, there's a few underlying movements. As you can see in the bridge, we expect inflationary cost pressure combined with the cost of the war and the pandemic to add incremental cost of around. 80 basis points or 200 million kroner compared to the original guidance. But we expect to offset this by a number of mitigating actions as well as some foreign exchange tailwind and therefore we can keep the EBIT margin guidance unchanged. And then on the next slide, 23, we know there's a wish from many of you to understand how inflation impacts our P&L. So we've added a table here which will give you a flavor of where we are. And as mentioned, we expect inflationary pressure and other costs to add around 200 million kroner to the original guidance, and that's the number in the last row on the table here. Around half of that comes from higher costs for energy, raw materials that are not hedged, and transportation costs. That's the first 100 million kroner and then we have the Russian trade receivable provision and the cost related to the COVID-19 measures in Thailand. And needless to say, the situation is changing by the day, and I'm sure that this picture might look different later this year. And then we go to the next slide, please. Before handing back to Alexander, then we'll just have what we're showing on this slide is the implied growth for the rest of the year. The 4 to 6% organic growth guidance for the full year implies between 0 and 2% growth for the rest of the year. And sequentially, the 0 to 2% is obviously quite a change from plus 21 in Q1. But that's among others where the COVID-19 lockdowns in Q1 of last year gave some noise. And we are facing some tougher comps in the quarters to go for the rest of the year. And for that reason, it might be easier to look at the growth compared to 2019. And that was what we're showing in the lower part of the slide. And then you can see that the implied growth for the rest of the year corresponds to between 12 and 15 growth versus 19. And that's at some points lower than the 18% growth that we saw in Q1. And that change is driven by, among others, the uncertainty related to inflation and consumer demand and the pandemic as well. And with that, I'll hand it back to Alexander and slide 26.