Pandora A/S Ord

Good morning, everyone, and welcome to the conference call for Pandora's first quarter results for 2023. I'm Bilal Aziz from the Investor Relations team, and I'm joined here by our CEO, Alexander Lachik, CFO Anders Boyer, and 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, then 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.

Thank you Bilal and welcome everyone. Let me start by sharing some key highlights from our first quarter. As you all know, the macroeconomic environment continues to remain challenging with consumers still under pressure. Despite this, we've just delivered yet another quarter which demonstrates our resiliency. The organic growth ended up plus one with our like for like flat. Underpinning this is our relentless execution of the Phoenix strategy. We've seen good progress on our key strategic initiatives. Worth highlighting is the strong growth of our Timeless and Pandora Army platforms. We also continued to complement this further through positive growth from our recent store openings, all of which are already accretive to both sales and EBIT. Given this value creation, we continue to see ample opportunity here for this year and beyond. You shouldn't be surprised to hear that profitability remains strong. Our gross margins continue to be rock solid and were helped by positive impacts from our pricing actions taken at the end of last year. We see this as an important milestone for the brand and we'll talk more about this later on. Finally, the cash profile of the business remains structurally attractive. We remain firm on our commitment to return the highest ever cash distribution back to shareholders this year. Now, let's move to slide four, please. Looking into the remainder of 2023, we remain confident of our prospects, but equally mindful of the ongoing macroeconomic uncertainty. We've started the year well and therefore have updated our organic growth guidance to minus two to plus three, with the EBIT margin guidance unchanged at around 25%. The lower end of the organic growth range would require a notably weaker economic backdrop than what we see today. We appreciate that this is still a relatively wide revenue range. It's still early in the year and we will continue to update you here as we move through the year. A few words on current trading. So far in Q2, we've seen our underlying trading to be broadly consistent with what we saw in Q1. And I want to remind you that we are only four weeks in. The environment remains uncertain and Q2 trading is concentrated around Mother's Day, which is still ahead of us. Nonetheless, we continue to be pleased with the underlying health of the business. Let's move to slide six, please. Before we go into the Q1 details, let's take a step back and look at exactly what we're trying to build here at Pandora. In a nutshell, it is to be the largest and most desirable jewelry brand in the world. Underpinning this is our execution of the four growth pillars of our Phoenix strategy. This covers driving a strong brand, leading in design, expanding our reach in core markets, and driving personalization. I'll take you through in detail some of our initiatives in the coming slides, but I wanted to reiterate that everything we do really stems from Phoenix. Next slide, please. One aspect of a strong and desirable brand is to offer a sharp value proposition. At the end of the last year, we successfully adjusted our prices to offset some of the inflationary pressures we, like others, have experienced. To remind you a bit about the journey we've been on here. In 2019 and 20, we went through a major promotional detox of the group that indirectly raised our prices, shifting more of our business into full price. Then early last year, we appointed a specialist pricing team. They were tasked with carrying out a comprehensive pricing analysis across the group. After extensive modeling and live testing, we decided to move forward. We rolled out the global price adjustments in Q4 of last year, It's important to highlight that we protected both strategic as well as opening price points. Since then, we've seen a broadly neutral impact to group revenues and a positive impact to our margin. This has been a good journey for us. We remain mindful of the current pressure on consumers and staying true to the brand promise of offering affordable jewelry. However, we certainly see further opportunities here. 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. Next slide, please. It's imperative that we continue to bring relevant consumer innovation in general, but to the moment's platform in particular. In January, we launched a new design of the iconic Pandora bracelet, the Studded Chain. This has been developed by our in-house design group and is unique for Pandora. It offers a totally different texture and shine versus our previous bracelets. The design came nearly 20 years after Pandora's initial snake chain bracelet, which resonates very strongly with consumers still today. I'm happy to report that the new carrier bracelet has started very well. It has driven good incremental growth for overall bracelets, and there is a very strong consumer pull of this new design. This demonstrates our ability to build out our moments platform for the long term. We know when we sell more bracelets, the consumers will come back to us for the charms. This unique captive business model is what puts us at a big advantage versus the rest of the jewelry market, as it secures a highly profitable and recurring revenue stream to our biggest platform. During the quarter, our base moments business continued to perform strongly. Overall growth was slightly down, but this reflected some weakness in newer charms. With the new bracelet underpinning growth, we remain confident ahead. Next slide, please. As part of our Phoenix strategy, we continue to extend our offering as a brand across different platforms. It's good to see some encouraging results here. Pandora.me has had a strong start to the year at plus 21%, like for like growth. This was relatively broad based. We optimized the assortment last year and execution has improved across many countries. It's a good example of our continued investments and learnings paying off. Timeless, which is our second biggest platform, has also had a strong start to the year at plus 11 like for like. Again, this was broad-based and helped by better execution and a strong Valentine's Day offering. I also want to highlight that Timeless acts as a powerful platform in attracting new customers into the brand. Our internal data here shows that our entry-level rings are opening up new consumers for us. We can then take them through the entire brand journey and retain them for a long time. Finally, performance in diamonds was stable and in line with our expectations. We continue to learn a lot here and see this as a big opportunity to transform the brand. We can see from the data that the consumer appetite for a lab-grown diamond offering is certainly there. During this year, we will expand our assortment to offer more classical ranges and continue with our plans for further geographical expansion. We will also ramp up our marketing efforts here to drive greater consumer awareness. Next slide, please. So have a closer look at the specifics of the quarter. Organic growth was plus one while like for like was flat. Underlying trading was broadly stable through the quarter. We are pleased with this continued resiliency of the group. As I'm sure you're all aware by now, the macroeconomic environment continues to be uncertain, with consumers under pressure. We have seen some pockets of weakness in some of our markets, but the core of the group remains stable and has been sold for four straight quarters. This stability speaks to two things. First, we continue to invest into the brand to ensure we're at the front and center of consumers' minds. Secondly, a diversified geo footprint remains a key pillar of strength. We believe we can continue to lift the structural penetration of the brand higher in pretty much most of our core markets still. Let's move on to the next slide to take a detailed look into the growth for the first quarter in some of our key markets. Let's start with our biggest market, the US, which delivered minus 7% like for like. This was in line with the previous quarter, but was impacted by some signs of greater consumer hesitancy with conversion rates slightly down. Looking at the performance a bit deeper, our performance improved sequentially in our own and operated stores, but was offset by weaker performance in the franchise channel. We are indeed looking at ways of helping our franchise partners to improve their performance. As I mentioned previously, we will be expanding our offering in diamonds in Q3 and also expand our rollout across more stores in the US. We are confident this will bring incremental growth later on in the year. The performance in our key European markets improved to flat like for like. This was helped by a small improvement in most of the markets. Germany was very strong at plus 11 and saw solid growth across all platforms. We continue to see a long runway ahead in this market for the brand. The UK remained resilient despite the weak consumer backdrop. Italy and France saw small sequential improvement, although remained soft given the macroeconomic backdrop. In Italy, while early days, we've noted slow improvements in the underlying trends. Next slide, please. In Australia, our performance delivered minus five like for like, which was impacted by the weak consumer sentiment. I'll touch on China in detail on the next slide, but on a high level, our performance improved through the quarter. in line with the economy reopening. We've seen a sequential improvement in traffic. I want to highlight this gradual return, but it's encouraging to see the positive trends continue. And in fact, our April like-for-like growth is now positive, albeit, of course, of a rather weak base. Finally, in the rest of Pandora, we continue to see strong growth driven by many markets. Mexico continued to stand out at plus 15, and Spain also continued to remain solid at plus 8. There was also strong double-digit like-for-like contributions from many other countries, such as Portugal, Brazil, Turkey, and Poland, to mention a few. Next slide, please. Coming back to China. After three years of COVID-related disruption, I'm happy to report that we are getting closer to the brand relaunch later this year. China has been a drag on the group like for like growth since 2020, and we now see an opportunity to turn the table. As we said previously, this will be more of a selected and gradual relaunch on a city by city basis. We look to see what we learn in each city and take it forward from there. We believe the brand historically has not had the correct focus. The first priority will be to reposition the brand and ensure we portray the core values. This will focus on Pandora's unique proposition how to express yourself through a moments platform. Another important aspect will be to invest sufficiently in media to drive awareness and finally meet customers in our channels with the correct sales narrative and storytelling. One important criteria for this effort to be successful is that traffic into stores significantly steps up from where we are today, or else it becomes challenging to ensure the right return on investment. Next slide, please. I wanted to remind you again of the significant value we create from our network expansion. We saw 3% organic growth contribution in Q1 from network additions carried out over the past year. This follows from already 3% we delivered last year. We will continue to push forward here this year as we target to open an additional 50 to 100 new concept stores and a further 50 to 100 shopping shops slash kiosks. Given the macroeconomic situation, we have the option to keep momentum here as access to good locations could open up. Our midterm ambition has been to open stores in the best 600 locations that we previously mapped in 2021. And you can see on this slide the type of financial impact that would have on our numbers. We don't think the story stops there. We continue to see further opportunity to expand the store network in areas where we don't have a Pandora store today. We'll update you later in the year on our plans to take this further. Next slide, please. Finally, I'm happy to report that after two years of extensive testing, we opened doors last month to our brand new store concept Evoke 2.0 in Italy. This is an important milestone in our evolution as a brand. The concept elevates the desirability of the brand and allows greater consumer engagement across all of Pandora's platforms. It's effectively a total redesign internally, and I'm confident this will mark a step change in the way consumers engage with the Pandora brand. We'll be rolling out more than 40 new store concepts this year, most of them in major cities in our core markets. And on that note, I hand over to Anders for a closer look at the numbers.

Thank you, Alexander, and good morning or good afternoon, everyone. Please turn to slide 18. The key takeaway from a financial perspective for the quarter was that performance was stable on the top line despite the macroeconomic situation and our profitability remains strong. I'll comment on revenue and EBIT on the following slide. So here on slide 18, I'll just pick out some of the other KPIs as usual. Our gross margin continues to strengthen and increased 150 basis points to 77.5% in Q1. And this is a continuation of the upward trends that we've been seeing during the past few years. The gross margin in the quarter includes a drag of 70 basis points from foreign exchange and commodities, but the underlying drivers continue to be strong and there's a positive impact from our pricing actions that is also in the gross margin this quarter. As you will remember, we decided to increase inventories last year during 2022, and this is why you see the working capital being higher on a year-over-year basis. On a sequential basis, our inventory levels are broadly flat. And for the full year of 2023, we also expect inventories to be broadly flat in line with what we communicated back at the full year announcement in February. Finally, I'll just mention that the slight increase in leverage net interest-bearing debt to EBITDA reflects the higher shareholder distributions, which we decided to pay out in order to move up from the low end of our capital structure policy range by year end to around the midpoint of the range. Then go to slide 19, please. And here we'll have a look at the revenue performance in the quarter. Organic growth came in at 1% for the quarter, as Alexander already said. But let me take you through a couple of the building blocks here in the bridge. First of all, like-for-like growth was flat in the quarter. And this was in line with the underlying level back in Q4, and it's in line with the high end of the guidance that we have for the full year of 2023. Secondly, we saw another quarter with solid contribution of three points of growth from network expansions. And just repeating what Alexander also said, I'll do that again, but it doesn't just drive top line, but also bottom line in our P&L. Then, as you can see in the pink bar in the bridge here, this growth was offset by the impact from the phasing of selling of minus 2 points, which is mainly a reversal of the positive impact we saw in Q4 of last year. This phasing impact is mainly something that we expect to see here in Q1. And that also means that we will see the network impact being more visible in the reported organic growth already here in the second quarter of the year. Then go to slide 20, please. This is the EBIT margin. And on the EBIT margin, the conclusion is that profitability remains solid and in line with our expectations, with all underlying drivers progressing as planned. And as a reminder of what we said in connection with the full year announcement, the EBIT margin in the first quarters of the year are expected to be below 2022 and then Q4 will be above 2022 and then with the full year broadly in line with last year. And that's also what we see here in Q1. In the underlying margin in Q1, and that is what we as usual have in the dotted box in the middle of the bridge, we saw positive impacts from the network expansion and the price increases. And this was then offset by the planned investments in Phoenix and the facing of costs that we had expected this year. And the reported EBIT margin was also impacted by the selling-facing impact that I mentioned on the previous slides. But overall, our underlying profitability and the drivers remain unchanged and strong. Now, then let's go to slide 22 and the guidance. As Alexander mentioned, we have updated our financial guidance slightly. So let me just quickly remind you of our thinking and where we stand today. We've started the year well with a flat like for like and current trading remains in line with that and thereby at the high end of our guidance. It's still early on in the year and the macroeconomic environment remains uncertain. But based on those two factors, we decided to update slightly the financial guidance for organic growth to minus two to plus three and thereby lifting the low end of the guidance from previously minus three percent. And as you can see in the bridge here, the updated guidance corresponds to a like-for-like growth of between minus 4 and flattest for the full year. Now then, the question that you may ask then is that, but this then means that Pandora guides that at best, like-for-like growth remains flat. And isn't there a case where like-for-like is positive in 23? And there's two points here that we would like to mention. First of all, the low end of our guidance would require a notable worsening of macro and trading conditions during the remaining part of 2023. Macroeconomic certainty certainly is still there. It's still early on in the year, and let's see where macro environment goes in the remaining part of the year. Secondly, If we put macro conditions aside for now and then just look at our internal plans in both the short term and the longer term, then we have great confidence that we can grow Pandora at good like for like levels and even higher organically due to the network expansion. We already set that back at the CMD in 2021 and we'll talk more about that at the CMD in October in London. In the short term, however, macro conditions, that's a fact, are likely to continue to wait on our like-for-like performance, and that's essentially what our guidance is saying. Then please go to slide 23 and the EBIT margin guidance. It's unchanged at around 25%. We started Q1 in line with our expectations, exactly as we said at the full year announcement, and we are on track to deliver broadly flat results. EBIT margin versus last year for the full year. And as a reminder, the guidance this year includes an extra element of flexibility, as we've called it. And in short, that means that if macro hits harder and growth lands towards the lower end of the guidance, then we will take cost actions that can keep the margin around 25%. On the other hand, if growth lands towards the upper end of the guidance, we still have the flexibility to invest even more in future growth if we decide to do that. And that principle that we outlined at the beginning of the year, that still holds. And on this slide, we have laid out the building blocks for the marketing guidance again, and they are broadly unchanged versus what we presented in connection with the full year announcement back in February. And with that, I'll hand it back to Alexander and slide 24.