Pandora A/S Ord

Welcome to the Pandora Interim Financial Report for the third quarter, first nine months of 2022. For the first part of this call, all participants will be in listen-only mode, and afterwards there'll be a question and answer session. Speakers, please begin.

Thank you. Good morning, everyone. Welcome to the conference call for Pandora's third quarter 2022 results. I am John Beckman from the Investor Relations team. I'm joined here in Copenhagen by our CEO, Alexander Lacek, our CFO, Anders Boyer, and the IR team, Bilal Aziz, who's taking over from me, plus Kristoffer 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. Go to 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 joined the call today. Q3 was another solid quarter. Compared to a clean base in 2019, our organic growth in the quarter was 13%. This is despite China dragging down the growth by 8 percentage points. The growth was driven by our main product platform, Moments, which continues to deliver. The launch of our lab-created diamonds collection in North America was well received. This is our first collection set in 100% recycled silver and gold. The launch is a transformative move both in terms of business as well as sustainability. I will talk more about this later. All in all, the execution of our growth strategy, Phoenix, is progressing very well. As you know, we are unfolding a number of strategic initiatives, including network expansion, more personalized marketing approach, a new store concept, and a new customer loyalty program, just to name a few. These are all on track. On top, our business continues to deliver profitable growth. In the quarter, EBIT margin landed at 18.6%. As previously communicated, the Q4 2022 EBIT margin is expected to be stronger than last year. But Anders will talk more about this in the guidance for Q4 a little bit later. I should say that the trading in Q4 so far has been in line with the Q3 performance and thereby also in line with the upper end of the implied guidance for Q4. I'm sure many of you will have heard that we had a fire in our European distribution center just over a week ago. Fortunately, no one was injured and all of the inventories unharmed. Our team in Hamburg is working hard to bring operations back to normal. In the meantime, we have inventory in the stores and we can also ship directly from Thailand. So despite the fire, we're well prepared for Black Friday and the peak trading season with a very exciting product lineup. Assuming that the distribution is back to normal in three to four weeks, counting from October 30, we expect some but manageable financial impact in Q4 2022 and all within the financial guidance for the full year of 2022. Now let's move to slide four, please. Our guidance remains unchanged, and we are on track to deliver on the expectations. For the full year of 22, organic growth is still expected to be in the 4% to 6% range, while EBIT margin is expected to be 25% to 25.5%. I think it speaks to the strength of our business model that we are so far able to navigate the elevated uncertainty in the markets and stay within our guidance. Slide five, please. I know a lot of you want to ask us about 2023 and our expectations to potential recession. It's a bit early to talk about 23 and we don't see a global recession creeping into our numbers yet. But I want to tell you how we're positioned to meet such a scenario should it materialize. Despite the rising macro uncertainty and the tense geopolitical situation, We have so far seen only limited shifts in consumer behavior. We are confident that our position in affordable gifting will support good financial performance even during a potential recession. Our starting point is strong. We have a favorable margin structure, strong cash generation, low financial leverage, and a conservative capital structure. In 2020, when the pandemic hit the hardest and we had significant store closures, Organic growth was down 11% and we still generated a 20% EBIT margin and almost 5 billion DKK in free cash flow that year. We are obviously taking prudent cost measures to protect our profitability, but we believe our strong starting point enables us to invest and accelerate. For example, our network expansion during a potential recession and come out stronger. Slide seven, please. Before we dive into the Q3 results in more detail, I want to give a brief update on the four main building blocks of our growth strategy, Phoenix. We are executing well, which confirms the potential we have ahead of us. The first and most important growth pillar is driving higher brand desire. Our brand is strong. We are the most recognizable jewelry brand in the world. One important indicator of brand strength is the fact that we have kept on growing during the last couple of years despite a significantly lower promotional level. This clearly suggests a healthy brand desire. We have recently implemented a global price increase on a select number of items. I'll come back to this point later. Secondly, in the design pillar, the focus is on driving the core while fueling the brand with more. Pandora Moment is the core of Pandora and continues to deliver solid growth. It's helped by innovations such as the Marvel Collection, where we recently launched Spider-Man. Last year we relaunched Pandora ME and this year we have taken our diamonds by Pandora to the world's largest diamond market, North America. But more on that a little bit later. Moving on, the third growth pillar is personalization. Here we're improving the omni-channel experience to offer consumers more personalized path to purchase journeys. Through the use of data, we are getting wiser every day on how to communicate and optimize our dialogue with consumers. With the use of data, we can design and create consumer-centric journeys supporting our top-line growth. The fourth and final pillar is about growing our core markets. Other than a purely geographic lens, we also include the network and channel development in this pillar. On one hand, we keep improving the quality of our existing network through relocations to better locations, as well as the work to develop a new store concept. On the other hand, we continue to fill in white space as well as selective forward integration. As we will discuss later, our network development is becoming more visible in the numbers, driving profitable growth. Slide eight, please. Our sustainability priorities are integrated into the Phoenix strategy. Sustainability is one of the foundational elements of the strategy, and we see that it supports our growth ambitions and align our actions with our values. Our three strategic priorities are low-carbon business, circular innovation, and an inclusive, diverse, and fair culture. The launch of Diamonds by Pandora in North America on August 25 marked an important step towards our ambitions to become low-carbon and circular. The lab-created diamonds have a footprint of 5% that of a mined diamond. On top of this, it's the first collection made with 100% recycled silver and gold. This is a major milestone on our sustainability journey. I believe the launch points to the future of luxury, and we're committed to drive this important transformation. Slide nine, please. We have a very clear value proposition. A key pillar of the brand promise is to offer affordable hand-finished jewelry. Aligned with this, we have created a global pricing architecture, which broadly can be likened to a rhombus. the bottom sharp end reflects our opening price points. As I mentioned before, we have in the last few years successfully reduced the promotion level, thereby indirectly increasing prices. Now, Pandora has implemented a more traditional list price increase. After successful testing earlier this year, we have increased prices on select items in North America. Similar price increases were implemented globally in early Q4. We have focused on items where we've identified a more favorable elasticity profile. It is very important to stress that we have not changed our opening price points or prices on items of strategic importance. We will continue to protect the strong value perception of the brand. You can think of this as stretching the rhombus architecture with the anchor point remaining intact. On average, prices were raised by 4% across the portfolio. The change was rolled out in October, so it's a bit early to conclude on the full impact. Slide 10, please. We are very pleased that Moments continue to deliver solid growth. This is the number one priority in the Phoenix strategy, even though the platform already accounts for 70% of our business today. Growth in the third quarter was fueled by our Disney collaboration, where especially Winnie the Pooh and friends have performed very well. On top of growing moments, we also want to fuel the brand with more product platforms. Our lab-created diamonds collection, Diamonds by Pandora, is the latest example. Let's have a closer look at the launch on the next slide, please. We launched Diamonds by Pandora in North America on August 25, as I mentioned. It's off to a good start. To remind you all, we have a selective distribution approach, which means approximately 270 stores across North America as well as online sell this collection. We have reached approximately 3% share of total business, and in the stores offering the collection, it reached a 5% share of business. We have a fair amount of stores trading at 10% share of business or more, while the bottom 80 stores are around about 2%. This shows the concept has strong potential. Our short-term opportunity is to improve the salesmanship, in particular in the bottom 80 stores. The US market for lab-created diamonds is 10 times that of the UK market, so we're very excited about this opportunity. The launch is another important milestone on our mission to democratize the jewelry market, of which diamonds are a significant part. We're also stretching the brand here. Diamonds from Pandora sell at 15 times the average selling price for Pandora products in the US. As I mentioned earlier, we gained a lot of attention when it comes to the sustainability profile of this collection. In particular, the relatively low carbon emission profile compared to mine diamonds. We grow the diamonds with renewable energy and they are set in recycled silver and gold. For one carat gold ring, this brings us to a carbon footprint similar to a pair of jeans. And of course, the ring lasts a good bit longer than the jeans. We are ready for a very important fourth quarter and have added a two-carat ring to the collection. We believe this will be popular with consumers leading up to the holidays. Next slide, please. Now, let's have a look at our core markets. As you know, we are well diversified geographically. Let's begin with our U.S. business, which continues to deliver strong growth versus 2019. As expected, it is down versus 21 since we are 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. Europe is a bit of a mixed bag. UK and Germany deliver positive sellout growth. This is thanks to consistent and solid operational effectiveness. France is more or less flat year on year. There are two opposing drivers in this business. On one hand, we have continued to significantly reduce the promotional pressure, which certainly shows up in the short-term sales performance. On the other hand, we have been stepping up our marketing efforts, which we see yielding in particular strong progress in terms of unaided awareness. This now must work its way into consideration and purchase metrics, which compared to the promo changes have a somewhat longer lag time. We see this as a good investment into the brand equity and remain focused on unlocking the potential in this market. In Italy, we see that the macro economy is impacting consumers' willingness to spend. We record very healthy traffic into our stores, but conversion rates and units per transaction are a bit softer. As mentioned, we have only seen limited shifts in consumer behavior on a global level, but Italy is the exception. Australia was up 40% versus last year due to temporary COVID-19 closures in 2021. china was weak as expected and severely impacted by traffic into stores being down 62 versus 21 again due to kobe 19 restrictions next slide please before i hand over to anders i want to reiterate the network opportunity for pandora which are also highlighted in our q2 conference call our baseline for growth is strong with a very profitable and cash generative store network In addition to this, we see an opportunity to expand the store network in areas where we don't have a Pandora store today. As we said at the Capital Markets Day last year, we see great untapped opportunities in making our brand more accessible in many of our core markets. We've carried out an extensive analysis of the real estate network in our top 40 markets. We have mapped 13,000 locations, and as a starting point, we have a plan to open new stores in the best 600 locations of those in the years to come. Our network expansion is starting to be visible in numbers here in 2022. Next slide, please. We expect to open net 100 and 150 stores until 2023. As you can see on this slide, the number for 22 store openings are driving incremental and profitable growth. There's 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 closes. If a recession hits, store opening is an area where we might lean in harder, as access to good locations could open up. It goes without saying that the deals must be very attractive before we engage. We are very focused on expanding the network with quality. And on that note, I hand over to Anders for a closer look at the numbers.