Pandora A/S Ord

Good morning, everyone, and welcome to the conference call for Pandora's second quarter results for 2023. I'm Bilal Aziz from the Investor Relations team. I'm joined here by our CEO, Alexander Latic, CFO Anders Boyer, and the IR team. 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 second quarter. As you all know, we've been presented with many external headwinds over the past year, but we've consistently delivered solid results. Q2 is yet another marker on our positive journey and is a testament to the Phoenix strategy. The organic growth in the quarter ended at plus 5, with our like-for-like accelerating to plus 2. Driving this performance has been good progress on our strategic initiatives. You'll notice that we delivered another quarter of strong growth across Pandora ME and Timeless. Meanwhile, our in-store execution continues to excel. It's clear all the investments we made in our retail platform are truly paying off. We also continue to demonstrate a rock-solid P&L structure below the top line. Our gross margins have continued to expand. and are still being supported from our pricing actions taken at the end of last year. And of course, this all feeds into a solid EBIT margin and a very attractive cash profile. You would have noticed that we initiated the second tranche of our planned share buyback of up to 5 billion Danish kroner. We are on track on returning the highest cash distribution to shareholders in Pandora's history. Now, let's move to slide four, please. Given our solid performance so far this year, we are raising our revenue guidance. We now expect organic growth at plus 2 to plus 5 versus previously at minus 2 to plus 3. The low end of the guidance would require notably weaker trading conditions to that what we see today. I appreciate this range is still somewhat wide, but we remain mindful of the uncertain macroeconomic environment and will continue to update you as we move ahead into Q4. For the EBIT margin, our guidance remains unchanged at around 25%. We remain firmly on track for this despite fueling the business with more investments into future growth initiatives. With regards to current trading, we've started Q3 well. In the first six weeks, like-for-like trading is up mid-single-digit percent levels versus the same period last year. I'll give a few health warnings, though. This has been helped by stronger-than-expected traffic during the summer season, and it's only six weeks of data in a still rather uncertain environment. We expect some of these trends to moderate. However, we are encouraged with underlying trading trends within our business. Now let's move to slide six, please. Before addressing the details of our Q2 performance, it's worth reminding everyone on what drives our performance, which is the Phoenix strategy. You're all probably used to this Phoenix wheel by now, but Q2 was another great example of how brand, design, core markets, and personalization sets us up for sustainable growth. I'll now give you more flavor on what that looks like when put into action. Next slide, please. I often get asked on some of our major brand campaigns, and I just wanted to show you here that there isn't just one answer to that. We have numerous ways to engage our consumers across the globe. This can be through celebrities, influences, or through some of our brand ambassadors, such as our new ambassador in France. The point I'm getting across here is that we have a large marketing toolbox available to us and we know how to use it. This matters through the entire year and especially during big trading events such as Mother's Day that we just had in Q2. When I joined Pandora, it was imperative that we built a strong brand with high desirability. We will continue to build on this good work and will share some further thoughts with you at the Capital Markets Day later this year. Now, when good brand activation is combined with good designs, that's when we thrive. That leads me nicely onto the next slide. As you all probably know, Moments is the core of our business. It's a unique, captive business model. When we sell more bracelets to consumers, then we know the consumers will come back for more charms over the course of at least 24 months. This secures a highly profitable and recurring revenue stream into the business. The key here is that we keep innovating to keep the platform fresh and relevant. I spoke last quarter about our new iconic studded chain bracelet, which offered a totally new design and texture. That has continued to do very well, driving solid incremental growth within bracelets. We now combine this with plenty of other new charms and base products, which resonated very well in Q2. Whether it was the B-Charm or the Sun and Moon rings, we continue to have a very healthy base business in moments. These helped drive the sequential improvement in Q2 for the platform where like-for-like growth ended at flat. Next slide, please. What a stable and healthy core allows us to do is continuously invest in our new platforms and further recruit new customers into Pandora. We then take these customers through the entire brand journey and retain them for a long time. I'm happy to report that this strategy continues to work. PandoraMe had another strong quarter with 17% like-for-like growth, which, once again, was relatively broad-based. I've always said growth in here will not be linear, but it's encouraging to see our increased focus here is driving solid results. Timeless, which is our second biggest platform, also reported another solid quarter with plus 7% like-for-like growth. Again, this was broad-based and helped by a strong product offering across Mother's Day. Some of the best-selling Q2 products you can see on this slide. Finally, performance in our diamonds platform was stable and in line with our expectations. Some of you would have noticed our announcement this morning on our future plans for diamonds, so let's speak about that in a bit more detail. Next slide, please. It should come as no surprise that we continue to remain very excited about the future of lab-grown diamonds for Pandora. We started our journey here just over two years ago through an initial pilot test in the UK and then a further rollout across select stores in North America. We have already learned a lot and see this as a big opportunity to transform the brand. We are now taking the next steps in our journey with a significant expansion of our product assortment. This will include three new collections which will be launched in a few weeks' time at the New York Fashion Week. The new collections feature more classical designs while still carrying a Pandora twist. This will give us a wider appeal than our initial rather narrow range. This will be accompanied by an exciting new marketing campaign which will centre on Pandora's key ideology, democratising diamonds. Keep an eye out for that. Finally, we will also be taking the next steps in our geographical rollout with plans to launch the platform across Australia, Mexico and Brazil within the third quarter. Our diamond jewelry continues to set the bar for the future of luxury when it comes to sustainability. Our diamonds have a CO2 footprint approximately 5% that of similar-sized mined stones, and we set them in 100% recycled silver and gold. As I said, this is an exciting journey for us, and we'll continue to elevate our offerings here. Next slide, please. Let's now take a closer look at the specifics of the second quarter. We delivered 5% organic growth with robust like-for-like growth of 2%. It's now the fifth straight quarter where we've delivered solid results despite the weak macroeconomic backdrop. One of the main reasons for this is that we have continued to invest into our brand, product and organization. I've already spoken about the first two, but I also wanted to highlight another data point of Pandora's performance within our own and operated stores. This remains very healthy at the plus 4% like for like in the quarter and is a testament to our investments in retail excellence and a reflection of how we become strong operators of our own brand. We will continue to work closely with our partners to help them narrow the performance gap so it's closer to that being delivered in our own stores. Now let's move on to the next slide to take a look at the growth in our key markets. Let's start with our biggest market, the US, which delivered minus 4% like for like, a small but important sequential improvement compared to Q1. Our performance here was helped by strong execution with better conversion rates on higher traffic. Similar to the last quarter, there is still a notable performance gap between our partner stores and Pandora and own and operate it. However, this did begin to narrow and we'll continue to work with our partners closely. We're of course not immune to the wider consumer uncertainty in the US. However, we have a good commercial pipeline ready for the second half of the year and we'll continue to push the brand hard. Next slide, please. The performance in our key European market was stable. The UK continued to remain resilient despite the weak consumer backdrop. Germany continues to be very strong at plus 11% like for like with good growth across all platforms. This market continues to offer good long-term structural growth for the brand. Elsewhere, Italy and France remain stable at minus 5 like for like each. Next slide, please. In Australia, our performance remained stable as well at minus 5, which reflects the weak consumer sentiment. I'll expand on China on the next slide, but after three years of consistent declines, we turned into positive like-for-like growth at 5%, albeit of a weak COVID-impacted base. Finally, in the rest of Pandora, we continue to see strong broad-based growth. There was a strong double-digit contribution from many markets, including Portugal, Poland and Turkey. Growth in Mexico and Spain also continued to remain very solid. Next slide, please. Circling back on China, after reporting positive like-for-like growth in Q2, I'm also happy to report that after three years, we've taken the first steps in relaunching our brand in the two cities of Shanghai and Beijing. The relaunch has centered on positioning the brand around a moments platform, and we've used a targeted local marketing strategy. It's very early days still, but we have seen a pickup both in store and online traffic across both cities. We will follow up with further data as we move ahead, but it's important to reiterate that this will be a gradual journey for us, and we will learn and evolve as we move ahead. Next slide, please. Network expansion continues to play a significant role in our value creation today and tomorrow. We saw 4% organic growth contribution in Q2 from network additions carried out over the past year. This follows from already 3% we delivered in Q1. We continue to have ample opportunity here and therefore now are targeting 75 to 125 new concept store openings this year, up from the 50 to 100 which we guided for previously. On top of this, you should still expect the further 50 to 100 Pandora operated shopping shops slash kiosks. To remind you once again, we create immense value from the expansion of our store network. You can see on the slide the financial impact our numbers would see if we were to meet a midterm ambition of 600 stores that were mapped back in 21. We don't think the story stops there and we'll update you later in the year on our plans to take this further. Next slide, please. Finally, I want to give you a quick update on our new store concept, Evoke 2.0. We highlighted that we opened our first store of the new concept in Italy in April, and since then we've opened a further six to a total of seven for the quarter. This includes a brand new store in Copenhagen Airport, which is on this picture that you see here. This new store concept serves two core purposes. The first one is to elevate the brand, and the second, positioning Panora as a full jewelry house. We plan to roll out a total of 40 of these this year, and I'm confident this will mark a step change in the way consumers engage with our brand. All the early days, the data from new stores which have been up and running has been encouraging. 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 to everyone on the call. Please turn to slide 19. The key message for the court from a financial point of view was that we delivered a robust top line and our profitability metrics remained strong. As usual, I'll do a quick deep dive on revenue and EBIT on the following slide. So here I'll just pick out some of the other KPIs. On the gross margin, that continued to strengthen and increased 170 basis points to 78.1 in the second quarter. There are multiple drivers for this strength, but you should take away that the underlying foundations of our profitability remain very solid, are the reasons for the upward trend over the past few years. The gross margin included a 30-point drag from foreign exchange and commodities, but that was then more than offset by the positive underlying drivers. I mentioned back at the Q1 announcement that you should think about 77.5% gross margin as an indication for the rest of the year. But now you can assume around 78% as the latest indication for the gross margin for the remaining part of the year. As a reminder, the increase in working capital reflects purely the deliberate increase in inventories that we did last year. And you can see in our numbers that this decision works out well and feeds into the good like-for-like performance that we are seeing in our own stores. On a sequential basis, our inventory level was again broadly flat. And for the full year of 2023, we also expect it to be broadly flat in line with what we communicated back in the last quarter. Worth noting is the improvement in the cash conversion in the quarter compared to last year. And that also mainly reflects that we now have the inventory position that we want. Finally, I would like to remind that the slight increase in leverage 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 by year end to around the midpoint by year end. And aligned with typical seasonality, our leverage will peak in the third quarter and then before falling back towards the midpoint in the fourth quarter. Then go to the next slide, 20, please. Now here we'll take a closer look at the revenue performance in the quarter. Organic growth came in at 5 points in the second quarter, but let me just take you through the key building blocks in the bridge. First of all, like-for-like growth was plus 2% in the quarter, and that was an acceleration versus Q1 and above the high end of the old like-for-like guidance. Secondly, we saw another quarter with solid contribution of plus four points from network expansion. And as we promised back in the last quarter, this became more visible in the overall group numbers for organic growth, despite that we still see some headwind of one point from sell-in phasing to partners and other revenue drivers. If you then go to the next slide, please. On the EBIT margin, the key message is consistent with that of Q1, and that is that profitability remains solid and in line with our expectations with all underlying drivers progressing as planned. In the underlying margin in Q2, we saw positive impact from the like-for-like growth, network expansion and price increases. And this was then offset by the planned investment and the facing of costs this year, as well as still having some headwind from foreign exchange and commodities. As a reminder of what we said in connection with the full year announcement, the EBIT margin in the first three quarters of this year is expected to be below 2022. And this then obviously implies that Q4 should be above 2022 in order to achieve the the full year EBIT margin at broadly in line with last year. And that's exactly the way to think about it. This is all simply cost facing and planned investment which we control. So that means that as long as revenue comes in in line with the guidance, we will deliver the full year EBIT margin guidance that we have laid out. As part of this, it's also worth noting that foreign exchange and commodities will be a tailwind in the fourth quarter after being a headwind for the first three quarters of the year. Now then, please move on to the guidance on slide 23. As Alexander already mentioned, we have upgraded our revenue guidance, so I'll just quickly remind you of our thinking and where we stand today. We've started the year better than expected with one point of like-for-like in the first half of 2023, and that's above the high end of the old guidance. On top of here, current trading in the third quarter so far has seen a broad-based pickup in like-for-like, and we expect that pickup in current trading to moderate somewhat after the holiday season, but the underlying trends remain encouraging. Against this, we still have a macroeconomic environment that remains highly uncertain. And based on those factors, we have updated the financial guidance for organic growth between plus 2 and plus 5 versus previously minus 2 to plus 3. And as you can see in the briefs, the upgrade in the guidance is mainly driven by the increase in our like-for-like assumptions, where we now see between flat and plus 2% like-for-like growth for the full year. So there's a few points we want to reiterate here. First of all, on the low end of the guidance, getting to the low end would require a notable worsening of of macro and trading conditions during the remaining part of 2023. Secondly, on the high end of the guidance, we started the third quarter well and we have plenty of Pandora specific initiatives to be excited about for the remaining part of the year. And we therefore acknowledge that there could be an upside risk, if you can call it a risk, but an upside risk to the high end of the guidance on a good day. Visibility is, however, low. Q4 is ahead of us and Q4 is our biggest quarter of the year, as you know. So we prefer to be prudent. But let's see how we progress. And then we will continue, obviously, to update you on our thought process as we go through the year. And then we will go to slide 24, please. On the EBIT margin, the guidance remained unchanged at around 25%. Q1 and Q2 were both in line with our expectations, and we are on track to deliver a broadly flat margin versus last year. And as a reminder of what we said earlier on, the guidance this year accounts for an extra element of flexibility. And in short, that means that if macro hits harder and growth would land towards the low end of the guidance, then we will take cost actions that can keep the margin at around 25%. And if growth lands towards the upper end of the guidance, we will then have the flexibility to invest even more in current and future growth. And you can see that dynamic already playing out where we have increased our Phoenix investments in what we communicated today in order to fuel future growth even more. And this is being funded through, among others, operating leverage. And on this slide, we have laid out the updated building blocks for the margin guidance. But I'm not going to go through that, but I can take questions, if any, when we get to the Q&A. And with that, I'll now hand it back to Alexander.