Pandora A/S Ord

Good morning, everyone. Welcome to the conference call for Pandora's Q2 2022 results. I'm John Beckman from the Investor Relations team. I'm joined here in Copenhagen today by our CEO, Alexander Lacek, and our CFO, Andres Boyer, and the rest of the IR team, Kristoffer Malmgren and Adam Fuglesang. 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 then kindly get back into the queue if you have additional questions. Slide two, please. Please pay a notice to the disclaimer on slide two and then turn to slide three. And Alexander, please go ahead.

Thank you, John, and welcome everyone who are joining us today. I'm happy to start out by saying that we have had another record revenue quarter. In fact, it's the third consecutive record quarter. Compared to Cleanbase in 2019, The organic growth in Q2 was 17%, this despite China dragging down the growth by 7 percentage points. In fact, halfway into the year, we can say that we have performed very well and managed to absorb significant headwinds in a number of areas, including COVID-restricted China, seizing our business in Russia and Belarus, high inflation and cost pressure on energy and raw. We consider the growth to be of high quality, underpinned by strong performance in our core moments platform. The execution of our growth strategy Phoenix is progressing very well. As you know, we are unfolding a number of strategic initiatives, including things like network expansion, new store concept development, and a new customer loyalty program, just to name a few. These are all on track. Our business model continues to deliver profitable and cash-generating growth. In the quarter, EBIT margin landed at 22.1%, and the underlying EBIT margin development was strong. Overall, and in spite of the macro headwinds, trading in the quarter was in line with our plans, and we're on track to deliver as guided. Today, we're also proud to announce the launch of Lab Credit Diamonds in North America. This is also our first collection set in 100% recycled silver and gold. The launch is a transformative move, both in terms of business and sustainability. Now, let's move to slide four, please. Well, key takeaway from this slide is that our guidance remains unchanged. For the full year of 22, Organic growth is expected to be in the 4% to 6% range, while EBIT margins are expected to be 25% to 25.5%. We'll provide a more detailed perspective on our assumptions later in the call. There is no doubt that there is elevated uncertainty in the world around us, but we believe we can navigate this within our guidance. Slide 6, please. Before we dive into the Q2 results, I'd like to give a brief update on the four main building blocks of our growth strategy, Phoenix. We're executing strongly, which confirms the potential ahead of us. The first and most important growth pillar is driving higher brand desire. We continue to see solid traction during key gifting periods, most recently Mother's Day, and this is an encouraging sign of brand relevance. Collaborations with other big brands such as Disney is a way to build awareness and drive brand desirability more. Finally, the brand experience we offer in our concept stores and online is of course essential to drive higher brand desire. Today, our customers enjoy the shopping experience and we believe it sets us apart in the affordable luxury segment. We'll continue to evolve the shopping experience. Secondly, in the design pillar, the focus is on driving the core while fueling the brand with more. Pandora Moments is the core of Pandora and continues to show its vitality. It delivers solid growth helped by innovations such as the new Marvel collection, for instance. To fuel the brand with more, we last year relaunched Pandora Me, and today we are fueling with even more with the launch of our lab-created diamonds in North America, the world's largest diamond market. But more on that a little bit later. Moving on, 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 performance continues to be very good. The testing of our new store concept is well underway and the launch of our new customer loyalty program in France is off to a strong start. The fourth and final pillar is about growing our core markets. This includes both increasing our network and growing the existing one. As we will talk more about later, our network development is starting to become more visible in the numbers, driving profitable growth. Slide seven, please. As you know, moments including collaborations is today 75% of our business, and it's our clear ambition to continue to grow it. As part of the Phoenix growth initiatives, we're also creating new platforms alongside moments with a launch and leverage mindset. This means we're putting more support behind new initiatives than we did in the past, with the aim that a new platform should reach at least 5% of revenue. We have announced two new platforms, our lab-credited diamonds collection, Pandora Brilliance, which I will go in more details with shortly, and Pandora Mii. Mii is aimed at Gen Z, which has gained solid traction in continental European markets, but still need to gain stronger traction in, for instance, US and UK. It's clear that establishing new and enduring platforms takes time. The model with test markets works well, as we have done with Brilliance in the UK. As the platforms develop and mature, we are closely monitoring the progress to adjust as we go, as well as assessing the true potential. Next slide, please. Our largest platform moment was a key driver of growth in Q2, delivering a 4% sellout growth versus 2021 and 11% versus 19. The performance was supported by strong Mother's Day trading. Moments was also supported by collaborations, not least the new Marvel collaboration with Disney. Collabs continued the very strong traction from Q1 and was up 34% in Q2 versus last year. There are more products from the Marvel Universe launching later this year. Next slide, please. As I mentioned, today we announced that we're launching Diamonds by Pandora in North America. It will be traded under the category name Diamonds by Pandora. And this is to mark that we anticipate further collections to be launched under the larger umbrella concept. This is another important milestone on our mission to democratize the jewelry market, of which diamonds is a significant part. We have generated important learnings from the UK test launch and that truly helped us sharpen the North America launch plot. We're very excited about this opportunity. The diamond jewellery is a 600 billion DKK market globally and lab-created diamonds are a growing part of that. North America is not only where we have our largest geographical presence, it's also the largest market for lab-created diamonds. We believe we have a unique position with our retail footprint, brand awareness and understanding of our customer base. Diamonds by Pandora will be available in 269 stores in North America and online starting August 25. Prices will start at 300 US dollars with stones from 0.15 up to 1 carat. There are two things which I'd like to highlight with this launch. First, we bring a very attractive design to our customers at an accessible price point. We continue to focus on the self-purchaser rather than the bridal market, and we believe our concept is far more unique in this space. Secondly, this launch marks significant progress on our strategic ambition to be a low-carbon and circular business and leading our industry in sustainability. The diamonds are grown, cut and polished using only renewable energy. And it's also the first collection set in 100% recycled silver and gold from Pandora. All of this results in a very low carbon footprint. Our diamonds have a carbon footprint of only 5% that of a mined diamond. In the press release we sent out this morning, you can see additional data points on the strong sustainability profile. I think we're helping set the bar for the jewelry industry when it comes to sustainability and show where the industry can go in the future. Next slide, please. Now, let's have a look at our core markets. Our US business continued to deliver strong growth versus 19. As expected, it's down versus 21, since we're comping the unusual effects from last year's stimulus checks. We have said all along that we expect the US market to slow down this year, and that was included in our guidance. Our key European markets had very strong growth in Q2, and all of them delivered double-digit growth versus 21. France and Germany represent great growth opportunities for Pandora, since our market share is well below that of more established markets like Italy and UK, for instance. Australia was up three points versus 21, and we expect Australia to be a bigger source of growth in the second half of the year since they were severely impacted by COVID-19 during that period of last year, hence cycling a weaker base. China was weak as expected and severely impacted by reduced traffic due to COVID-19 restrictions. Now, let's have a quick look at the rest of Pandora on the next slide, please. The rest of Pandora accounts for 28% of the overall business and had an organic growth in the quarter of 26% versus 21%. The biggest markets here are Spain, Mexico and Canada. And I want to give you a bit more color on these markets since they represent good opportunities for future growth. Spain had revenue of almost quarter of a billion DKK in the quarter, equal to France in 21. Spain had revenue of 900 million but trending higher this year. Last year we converted 44 franchise shopping shops to Pandora owned with very good results. Mexico had revenue in the quarter of 185 million, which is more than China in fact. and delivered 49% organic growth in the quarter versus 21. Mexico is approaching an 800 million DKK of revenue in the year, and we still have an opportunity to expand our network. In Q2, we opened up 25 shopping shops in Latam, of which 13 actually were in Mexico. Canada delivered 44% organic growth in the quarter. We have strong opportunities here as well to grow our market share and brand awareness. Next slide, please. At the Capital Markets Day last year, we told you about how developing the network is an important source of revenue growth. I want to follow up on this since we're starting to see meaningful incremental revenue from our network expansion and forward integration. We expect to open net 100 to 150 stores until 2023, and store openings are EBIT margin accretive. The stores we opened in 2021 are now tracking at roughly 40% EBIT margin in the first half of 2022. There is also a short payback of roughly one year on the CapEx investment, and new lease contracts are in most cases quite flexible and include regular break clauses. Forward integration added one percentage point to revenue in Q2, mainly driven by store acquisitions in the U.S. We always assess potential takeovers on a case-by-case basis. If we do a deal, it's roughly EBIT margin neutral and has a short payback. Next slide, please. As mentioned, one of the key growth pillars in our strategy is personalization, creating a true omnichannel experience. As part of this, we're testing a new store concept called Evoke. So far, we have opened up 12 stores across five of our key markets, being US, China, UK, Italy and Germany. It's still early days, but we can see that customers spend more time in the store, and this obviously opens up for more engagement opportunities with our sales staff. The new stores have outperformed during peak periods, and the sellout growth in the new stores is also slightly higher than in our other stores. This indicates to us that Evoke concept works very well. We're planning to open up 35 more stores, Evoke stores, I should say, in the second half of the year, and then we'll scale it further in the next year. Next slide, please. Before I hand it over to Anders, I would like to comment on another key enabler in the personalization journey, our new customer loyalty program called MyPandora. We told you about the launch in France last quarter, and so far it has showed strong results. Roughly a quarter of a million consumers have already signed up. and more than 60% of them have already made a purchase. While it's early days we have also noted improvement in basket size which is up by 18% and units per transaction up by 27%. Now these data points will need more time to mature but clearly early days the business case continues to seem very sound. We get access to quality consumer data more effectively and this allows for creating a stronger bond to the brand. We can personalize our marketing activities and also target our media efforts much better. Finally, MyPandora is also a key enabler in developing our omnichannel experience, both on and offline, as it actually allows our store staff to easily identify consumer interest and purchase history. We will launch MyPandora in more markets in 2023. And on that note, I hand over to Anders for a closer look at the numbers.

Thank you, Alexander. Then please go to slide 16. The key message for our second quarter financials is that they were in line with our expectations. I'll cover a bit more on revenue and EBIT on the following slides, so on this slide I'll just give a few comments on some other KPIs. Our gross margin remained strong at 76.4% in the quarter, and that's despite 180 basis points of headwinds versus last year from commodity prices and the temporary drag from forward integration that we have made. And when I say that, then it also means that the gross margin on a run rate basis should be higher than in the second quarter when we look forward. You probably remember that during the last quarters, we have deliberately built inventories to mitigate the risk of supply chain disruptions, and we did that in the second quarter as well. We are now broadly where we want to be on inventory levels, but we do expect inventories to increase a bit further in the third quarter, as usual, as we prepare for the peak trading season in Q4. And the decision to increase inventories will of course have a temporary negative impact on the cash conversion. We have received some questions about whether the higher inventories represent a risk going forward on discounting. I think we should address that upfront and say a clear no. the inventory that we have built is on our high runners so this is a networking capital question only if I can put it like that Alessandro has already told you about the investments that we're making in our business as part of Phoenix, and that is also visible in the CapEx level, as you can see on the slide here. Then CapEx is double up in percent of revenue versus last year. And then just finally, I would like to highlight a number which is not on this slide. And that's the announced share buybacks and the dividend that we will be doing in 2022. And the total payout to shareholders that we have announced equals around 10% of our current market cap. Then go to the next slide, please, slide 17. That's the revenue performance in the second quarter that we have on this slide. As you know, we guide on organic growth, and it came in at three points in the second quarter, and that's the black. bar in the middle of this bridge. And as Alexander said, that equals 17% organic growth versus 19%. The organic growth was driven both by sellout of two points, that's the first light gray box on the bridge here, and network expansion adding two points also to the growth. As Alexander mentioned, growing the network is a core part of the Phoenix strategy and it is becoming visible in the numbers. As you know, we have ceased business in Russia and Belarus and this drags down the organic growth by around one point in the second quarter together with a couple of other minor factors. Forward integration also supported revenue growth by one point. It's mainly stores in the US. And the one point shown here as forward integration is the part of forward integration where some kind of goodwill is paid and therefore it is not included in the organic growth. And then finally, when you move right in the bridge here to get to the 10% total reported revenue growth, then you can see that there's quite some foreign exchange tailwind of six points in the quarter. Then go to slide 18, please, and the EBIT margin bridge. There's quite some moving parts in this EBIT margin bridge in the quarter, but the key message that we want to pass on is what we have in the dotted box in the middle here, showing that there's a slight improvement in the underlying EBIT margin versus the second quarter of last year. And that improvement came from a combination of operating leverage and from some gross margin efficiencies, which was then so partially offset by our continued reinvestment in the business. And this is in essence how we see our business. As you know, there's some operating leverage as we grow, leverage on our cost base. And then we reinvest some of that or all of that leverage in strengthening the business and driving future growth. Outside of the dotted box, we have isolated some temporary factors impacting the margin, both last year to the left and this year to the right. And if you look at the elements to the left, I want to give just a comment on the bucket that's called net impact of store closures and US stimulus. Last year, the EBIT margin was impacted by these opposing factors that last year lifted the EBIT margin by roughly net one percentage point due to the elevated growth based on the US government stimulus packages that we saw last year. Obviously, it's not exact science and you should review this one point as directional only, but there's no doubt that net-net, it's a drag. on the EBIT margin compared to last year. Then if you look at the elements to the right, that's the temporary factors this year. Then most importantly, there is a drag from forward integration as we brought back inventory at wholesale value. And this is, as most of you probably know, at three to six months temporary drag when we take over a partner store. And then let's go to slide 20, please, and the guidance, the 22 guidance. The second quarter trading was in line with our plan and we keep our guidance unchanged. And then I just want to stress what Alexander already says that the macroeconomic outlook obviously is associated with elevated uncertainty. The overall guidance is unchanged, but we have made some smaller tweaks to the underlying sources of growth, and I'll just give a comment on that. On the one hand, we have increased the guidance from network expansion from one to two points last quarter to two points. and then on the other hand we see a slightly lower selling to the partner channel and that includes the fact that we have seized the business in Russia and Belarus but that's also a couple of other smaller But as you can see, it's in the roundings and decimals and between minus 1.0 impact on the organic growth this year. We've also made some smaller changes to the directional growth assumptions. That's the assumptions, as you can see in the pink box on the slide here. and the short version of the assumptions in the pink box is that we have adjusted the growth assumptions for the U.S. down a touch, and then we have the assumptions for the rest of Pandora is up a touch, but the total is the same. The guidance is unchanged. Another thing we just want to highlight as sort of ahead of the second half of the year is that the sources of growth in the second half would be different in the first half of the year. There will be some shift in which countries are contributing to growth. Europe will obviously be comping a more normal second half of 2021 without COVID closures. And then on the other hand, Australia will have quite easy comps due to the lockdowns, especially in the third quarter of last year. And then China will also be facing easier comes but will still be at a track on the total Pandora growth in the second half of the year. Then let's move to the EBIT margin on slide 21. The EBIT margin guidance is unchanged as well. The fourth quarter will be the most profitable quarter of the year in line with the normal seasonality, and that should probably not be a surprise. But I want to highlight that due to a bit of phasing on both revenue and cost, The Q4 margin is expected to be relatively stronger than last year, and the third quarter margin a little bit lower. In reality, it's more like normal. If you look back in the past, and not just back to last year, then the seasonality we are getting into is actually just more normal for Pandora, but I just wanted to highlight that. Then slide 22 and the implied guidance for the rest of the year. The 4-6% organic growth for the full year implies organic growth for the rest of the year of between minus 1 and plus 2. That's what you can see in the upper part of the slide. And then in the lower part, you can see that this is equal to between 12 and 16 points versus 19 in the second half of the year. And that's just two things we wanted to mention here. First of all, and this is important, the lower end of the guidance is most likely to come into play only if we see a further worsening of the macroeconomic environment. Secondly, we want to highlight that in terms of growth versus 19, then the third quarter is expected to be lower than Q4. And this is also what we saw last year where the Q4 growth was six points higher than the third quarter. And then, as you can see in the first bullet about EBIT margin on the slide here, then the implied EBIT margin for the rest of the year is 27 to 28%, and thereby roughly 50 to 150 basis points above last year. And with that, I'll hand it back to Alexander, and please go to slide 24.