Pandora A/S Ord

Good morning everyone and welcome to the conference call for Pandora's full year 2022 results. I'm Bilal Aziz from the Investor Relations team and I'm here joined with our CEO Alexander Lakic and CFO Anders Boyer and the rest of the IRT. As usual there will be a Q&A session at the end of the call. If you could kindly limit yourself to two questions at a time that would be great. Please pay notice to the disclaimer on slide two and turn to slide three. I will now turn over to Alexander.

Thanks Bilal and welcome everyone. Let me start by taking a step back and look at 22 as a whole. As you all know, the year was marked by heightened macroeconomic and geopolitical uncertainty. And of course, as well as the ongoing COVID-19 situation in China. Despite all of this, we still delivered at the high end of our expectations. The organic growth ended at plus seven with our sellout growth at plus four. I believe the year very much demonstrates how we are able to navigate uncertain times thanks to the combination of our strong brand and our diverse geographical footprint. As ever, our growth continues to be highly profitable. The gross and EBIT margins expanded and we saw some promising results from the price increase. I also want to highlight that we retained good discipline in our promotional activities. Due to the weaker macro economy, we faced a more competitive environment in general and a sharper promotional pressure during Q4 in particular. Underpinning the resilience is our relentless execution of the Phoenix growth strategy. A couple of key points. Our core remains in incredibly good shape and we delivered solid sellout growth for moments. During 22, we expanded our store network and opened a net 88 new stores. Network expansion is a very productive growth driver which has short payback and is a low risk opportunity in our toolbox. Of course, embedded within our strategy are our ambitious sustainability objectives, and we made good strides on this front as well. We also received some important recognitions that I will come back to in a minute. Now, let's move to slide four, please. Looking into 2023, we are confident, but we remain vigilant due to the macroeconomic uncertainty, although we have so far only seen limited shifts in consumer behavior and have been quite encouraged by early trading this year. However, our job is to prepare for all scenarios, and we have today issued our preliminary guidance for 2023 of organic growth of minus 3% to plus 3%, and EBIT margins around 25%. The wide range revenue range accounts in the lower end for a scenario with a somewhat weaker economic backdrop than what we see today. As usual, we'll look to narrow the range and provide updates as we move through the year. Despite this uncertainty, our starting point is strong. We have a strong brand with a diverse geographical footprint, as I mentioned, a favorable margin structure and a strong cash generation. We have already taken prudent cost measures to protect profitability, and we are able to invest and accelerate. In addition to continued strong marketing and innovation efforts, we intend to accelerate our network expansion plans. A few words on current trading. It is very early days and January is a small month for us. Nonetheless, we've been encouraged by what we've seen so far with a good broad-based pickup in sellout growth in the first five weeks of the year. This will clearly moderate from now as it's helped a bit by easier comps in Jan 22 due to Omnicrom and a slightly earlier timing of some product launches this year. But even accounting for that, we're pleased with the underlying health of the business. We believe trends are stable versus what we witnessed on an underlying base in Q4. Now let's move to slide six, please. Before diving into the Q4 results in detail, I want to give a quick recap of the four pillars of our growth strategy Phoenix and some key takeaways from last year. First, our brand momentum remains strong. We're the most recognizable jewelry brand in the world and will continue to invest in marketing to retain this position. We continue to test new heights for the brand strength, and our recent price increase is a good example of that. Secondly, we continue to elevate our core business. Moments stand strong as the engine that drives Pandora, and we continue to innovate here. Our Spider-Man collection was well received, and we have plenty more to be excited about for 2023, with, for example, the new iconic studded bracelet. We also remain focused on driving new platforms, and last year we brought our diamonds by Pandora to the world's largest diamond market in North America. Thirdly, we are making better use of data analytics to get wiser on how to engage with consumers. One example of this is the launch of targeted marketing in the UK with SMS messages over the Christmas period. We have seen encouraging results from this. Finally, our fourth pillar is about growing our core markets and optimizing our store network. As mentioned already, we added 88 concept stores in 2022, and these are already contributing positively to our performance. We're planning to increase our efforts here for 2023. Please go to slide 7. Sustainability is one of the foundational elements in our strategy. It is about future proving the company. We see that it supports our growth ambitions and aligns our actions with our values. Our three strategic priorities are low carbon business, circular innovation and an inclusive, diverse and fair workplace. The launch of Diamonds by Pandora in North America last year was a very visible mark of our ambitions to become low carbon and circular. Our 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, a major milestone. We have recently received a couple of important recognitions for our sustainability efforts, an A-score from CDP and a leader rating from Sustainalytics. I'm happy that this work is getting noted as our aim is to lead our industry on this agenda. Next slide, please. In the fourth quarter, we've had plenty of great moments to ensure we stay top of mind for our consumers, not least our collaborations where we continue to see great traction and remain excited for 2023 with Disney's 100-year anniversary. You can also see how our diamonds launch has also already started to stretch our brand. And I'll talk more about this in a second. In short, our brand momentum remains strong and we are focused on taking this even higher. Next slide, please. As you may remember, we implemented a 4% global price increase across the portfolio in early October. It was the first time we did something like this in a systematic way. We based it on successful testing earlier in the year. I would like to remind you that we did not change our opening price points on items of strategic importance. We believe the DNA of the brand lies in strong value perception and that will not change. I'm very pleased to report positive initial analyses, which indicate that this has a positive impact on profitability. Given the heightened consumer pressure on discretionary categories such as ours, we interpret these results as very promising for the brand's strength and future potential. We will now be moving ahead with an annual structured review of prices to identify further opportunities. It's too early to say how much or when, but we will continue to be guided by the data and are confident we can stretch our pricing architecture further. Slide 10, please. As mentioned, we are pleased with the resilience we have demonstrated. Although we saw pockets of macro-driven weakness in some markets, the core of the group remained stable. To remind you of the numbers through 2022, the first quarter was obviously inflated by the pandemic in the comp base. The sellout growth was plus two in the second quarter, plus one in the third quarter, and basically flat in the fourth quarter if you adjust for the fire at a distribution center in Hamburg. And as you can see in the lower graph, the same is the case for sellout versus 2019. In fact, sellout versus 2019 increased through those three quarters. This stability speaks to the diversified footprint we have and the fact that consumers have a special connection to, in particular, the core of our business moments. This is why Moments was and is the number one priority in the Phoenix strategy. The captive business model is unique. The many millions of installed Moments bracelets enables a strong and highly profitable recurring business stream from our charms portfolio. We not only own this model, we are demonstrating day in and day out that we are the masters of this platform. Let's move on to the next slide to take a detailed look into the growth for the fourth quarter. Trading through the quarter was roughly flat, with November in particular being impacted by the fire. We did see consumer behavior and trading being more in line with pre-pandemic trends, where Christmas shopping happened closer to the day. So in that respect, it was more of a normal year. We ended at minus 1% sellout growth, which is basically flat if you're just for the fire, as I mentioned. As I said before, in Q4, we did see notably higher external promotional environment. We partly expected this given the macro. We remained disciplined and were tactical in our approach. We ran our promotions for slightly longer in some markets, but kept the absolute promotion level consistent. We play in the mass market, so we will sometimes have to react, but it is controlled and it's surgical. In that respect, our promotional days have been back to normal so far this year. Going into the individual markets, you will see that some of our key markets declined in Q4. However, there are reasons for this, so let me talk you briefly through this. Firstly, as I'm sure you remember, we flagged at the start of the year that the US business would decline in 2022 due to the comping effects of the stimulus checks back in 2021. This did indeed take place, but was better than our initial expectation. Our US growth in Q4 improved sequentially to minus seven as the underlying business remains solid. Secondly, our total European growth was encouraging at plus two in the fourth quarter. We did see some macro impacts, mainly in Italy and France. We flagged some of this at Q3 already, and it was a continuation of that very same trend. Elsewhere, Spain was very strong, and the UK remained resilient despite the quite weak macro backdrop in there, in fact. We're generally encouraged by the performance in Europe, and in the few markets where there is broader market data, we believe we are gaining market share. We will continue to invest in marketing to consolidate our position further. China was weak. As expected, traffic was materially down due to the COVID-19 situation. Now, I know some of you may ask what we're seeing today in China. It's still very early days with a lot of uncertainty, but we've seen some clear pickup in the brick-and-mortar traffic across our stores in January. We will be moving ahead with our brand relaunch for China in the second half of the year, but right now it's too early to call how China ends up finally through the year. And finally, in rest of Pandora, we saw good, strong growth driven by many markets, particularly Mexico stood out with plus 34, which also put them at the $1 billion, no, not dollar, DKK revenue mark. Next slide, please. We launched Diamonds by Pandora in North America end of August. We did this with a selected distribution across 269 stores as well as online. We continue to see promising results with the best performing stores adding 10% of incremental sales. There is a large range on this, but we are convinced that the opportunity is vast. We believe the brand is ready to be stretched with the category selling at 15 times the average selling price from Pandora's traditional US products. Looking ahead, we will now be scaling up our efforts and see three main opportunities. First, optimizing and adding more to our assortment. We believe a greater product range will appeal to a wider market. Secondly, improving the salesmanship from learnings in the best performing stores. And finally, continue to sequentially expand into new markets. Our move into this category aligns well with our sustainability strategy. In particular, the relatively low carbon emission profile compared to mined diamonds. We grow the diamonds with 100% renewable energy, and they are set in recycled silver and gold. So for a one-carat ring, this brings us to a carbon footprint similar to a pair of jeans. And arguably, it lasts a bit longer than that. In conclusion, it's a promising start for us. Growth here will not be linear, but we remain convinced of the transformative nature of this move for the brand. Next slide please. Now, this is a slide that I'm sure some of you are getting familiar with, but the network opportunity is very important for us. So let's have a look at it again. 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. We see great untapped opportunities in making our brand more accessible in many of our core markets. Back in 2021 we 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 plan to open new stores in the best 600 of those in the next few years. Next slide please. As I mentioned already, our network expansion has become more visible in the numbers through 2022. We ended up opening 88 net new concept stores and 130 owned and operated shopping shops. Combined, this contributed to 3% of our organic growth. We're now targeting an additional 50 to 100 new concept stores in 2023, which would add an additional 2 to 3 points of organic growth. Given the macroeconomic situation, we have the option to keep momentum here as access to good locations could open up. This means we'll be at least towards the high end of the initial guidance we gave in 2021 of 100 to 150 new stores over the period of 2022 and 2023. As always, the deals must be very attractive before we engage. We are focused on expanding our network with quality. There is 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, which significantly reduces our risks. Finally, we've been hard at work to develop a new store concept that we call Evoke 2.0. This will be rolled out at scale starting this year. And on that note, I hand it over to Anders for a little bit closer look at our numbers.

Thank you, Alexander, and good morning and good afternoon, everyone. And please turn to slide 16. The key takeaway for the quarter was that performance was in the high end of our expectations, and not just on the top line and on the bottom line, but also on some of the other KPIs, such as cash conversions and earnings per share. I'll comment on revenue on EBIT on the following slide. So on this slide, I'll just pick out some of the other KPIs. On gross margin, it remained strong and it expanded at 50 basis points year over year. And that's despite 90 basis points of headwind from foreign exchange in the quarter. So there's an underlying gross margin expansion of more than 100 basis points, and that reflects a combination of, for example, our price increases and channel mix, and it's also a testimony to our good promotional discipline in the quarter. On cash conversion, we saw, as expected, a big improvement sequentially and landed at 110% in Q4. And that number includes a decrease in the inventory level to just above just around 4 billion kroner as we also flagged back in the third quarter announcement. And most of you know that we decided to increase inventories during the initial part of 2022. And this obviously impacts the cash conversion for the full year. But with this behind us now, that also means that in 2023, this year, we expect cash conversions to be back to the long-term sustainable level of around 70% for the full year. And then go to slide 17, please. This is the revenue bridge for the quarter. Organic growth came in at plus 4% for the quarter, and on a three-year stack versus 19, that's an acceleration to 17% growth up from 13 that we delivered back in the third quarter. The first building block in the revenue bridge on the slide is sell-out. And the sell-out growth was negatively impacted by the fire in the European distribution center by around one point. There's no insurance compensation for the revenue loss included in the Q4 numbers, and that will be a potential income in the financial statements for 2023. On top of sell-out, we saw, as already mentioned, a solid contribution of three points from network expansion. And the network, by the way, doesn't just drive top line, but also bottom line. And then go to slide 18, please. On the EBIT margin bridge, I'd just like to draw your attention to the dotted box in this bridge. and that shows that our underlying EBIT margin was up 110 basis points versus Q4 of 21. The reported EBIT margin was up even more, 280 basis points, and that was partly helped by some one-off costs that we had in Q4 back in 2021, and we've illustrated that in the left part of the bridge here. Then let's move on to slide 20 and the guidance for 2023. We have obviously spent more time than normal reflecting on the financial plan for 2023 and our financial guidance. Let me just start by giving you a few corner posts for our thinking behind the guidance. And the first corner post is that, as Alexander showed, that revenue growth has been resilient during the last three quarters despite the growing micro headwinds. And quarterly sellout growth has also been broadly flat both year over year and also versus 2019. The second corner post is that the external data, external experts continue to show a challenging backdrop for consumers and a general consensus that macro is going to be weak in 2023 and with some markets being in a recession. And the third corner post we would like to mention is that we continue executing on the Phoenix strategy in 2023. The macro environment does not change that. We're just making a few twists in terms of priorities, and of course we also have a harder push on cost. And all of that has led us to give a relatively wide guidance on organic growth from minus three to plus three. And as you can see in the bridge, the guidance includes a flattish to mid-single digit decline in sell-out. And the midpoint of that range is obviously a slowdown compared to the last couple of quarters, and it's a slowdown compared to the underlying current trading, because the underlying current trading, as Alexandre already mentioned, is at the high end of this guidance range. But it's still early on in the year, and we prefer to be cautious, and let's see where we land the year. But to put it in another way, our key message with this guidance is that, first of all, that we are preparing for a difficult trading environment entirely driven by macro. We don't really see this in the numbers yet, not in Q4 and neither in the current trading. But now we have set the cost base to prepare for a difficult macro environment and thereby protecting margin in 2023. And then go to the next slide, please, the EBIT margin. We're guiding around 25% EBIT margin for this year. And this may probably look a bit narrow, given the range on the top line guidance. But the way we think about it is that the current macro environment requires an extra element of flexibility and quick reaction on the cost side in Pandora. In short, if macro hits harder and growth lands towards the lower end of the guidance, we will take cost actions that we believe can keep the margin around 25% despite lower top line. And if growth lands towards the upper end of the guidance, we would like to have and retain the flexibility to invest more in future growth if we decide to do so. We've laid out the building blocks for the margin guidance on the slide here, and we are happy to dive more into that if you have questions either here or in a follow-up afterwards. There's just two things I would like to note. And the first is that the recent combined adverse movement of foreign exchange and commodities gives us a net 40 basis points headwind on the margin versus last year, versus 2022. And the second thing is that within the guidance, we have absorbed the margin impact coming from higher than normal salary increases that we expect here in 2023. Then some of you may also ask what the current guidance means in relation to the capital market day targets that we issued back in September 21. And clearly, the world has changed significantly since we issued those targets with the weaker macroeconomic backdrop and the ongoing COVID-19 situation that we are still facing in China. Despite that, our new EBIT margin range is actually currently just within the targeted range that we set out back at the CMD in 2021. And for the growth guidance, I want to stress that as a greater element of uncertainty, but the upper end of the new guidance would place Pandora within the CMD range despite the macro situation. And let's see where we end up when the year has gone. Then let's go to slide 22, please. On this slide, we have the other guidance parameters for the year. And Alexander has already covered the store, network, ambition. So the other one to mention is the pick-up in capex to 6% of revenue this year. And this pickup mainly reflects our investments in the store network, both new stores as well as refurbishments. And it also reflects our new ERP platform and a number of other digital investments. And the six points of revenue is in line with the target from the CMD back in 2021. And finally, we expect the effective tax rate to be in the same range as we guided for last year, being 23 to 24%. And then go to the next slide, please. I'll finish off with an update on our cash distribution for the year. Our cash distribution for 2023 is a signal of confidence and a signal of strength. We have ample liquidity. We have a fairly low leverage. and we will continue to generate good cash in 2023. We are therefore announcing this morning a total cash distribution to shareholders of up to 6.4 billion Danish kroner. And at the full amount, 6.4 billion, that will be around 11% of the current market cap. This includes a proposed dividend of 16 kroner per share, and that's in line with last year, and it reflects actually a shift in our dividend policy from previously targeting a 2% dividend yield to now a progressive dividend per share. And on top of this, we also this morning announced a new share buyback program of 2.4 billion kroner running until the end of June, and then with a clear ambition to get to 5 billion kroner as we move through the year. And with that, I'll hand it back to Alexander, and please go to slide 25.