Pandora A/S Ord

Good morning, everyone, and welcome to the conference call for Pandora's third quarter results for 2023. I'm Bilal Aziz from the Investor Relations team, and I'm joined here by our CEO, Anderson Olatik, CFO, Anders Boyer, and the remainder IR team. As usual, there will be a Q&A at the end of the call. If you could kindly limit yourself to two questions, 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.

Good morning, thank you Bilal and welcome everyone. First, let me begin with some key highlights from the third quarter. We're very pleased that delivering a strong quarter. This once again demonstrates how the Phoenix strategy is coming together to really drive strong growth. The organic growth ended at plus 11 and are like for like accelerated to plus 9 in the quarter. We can clearly see that we've got good brand momentum from the various initiatives we're implementing and we are therefore attracting new consumers into the brand. You'll notice that the like-for-like growth was broad-based across our collections and most of our markets. Once again, the P&L structure remains highly attractive. Our gross margins have now reached an all-time high of 79%, driven in part by our efficiency gains and pricing actions. This all still feeds into a solid EBIT margin and a very attractive cash profile. To put this all together, the Phoenix strategy is working and we can see that directly through attracting new consumers. Our business model means we can capture all of this value to generate significant value for our shareholders. Now let's move to slide four, please. Considering the progress we made so far this year and our outlook, we're changing our revenue guidance. We now guide organic growth at plus five to plus 6% compared to the previous one at plus two to plus five. Our EBIT margin guidance remains unchanged at around 25. We are firmly on track for this despite continued investments into our business to drive future growth. Now I'll give a few quick words on current trading. We started Q4 well. In the first six weeks, our underlying like-for-like trading is up high single-digit percentage levels versus the same period last year. This is a good start. We should also keep in mind that the majority of Q4 revenue is accounted for by November and December. So in that context is a smaller sample size. We look ahead with confidence, but naturally would expect trends to moderate a bit as we head into the holiday season, where it's typically more competitive from an external standpoint. Now let's move to slide six, please. As most of you are aware, last month we hosted a capital markets day in London, where we laid out our plans for the next three years. Before I dive into the third quarter, I just wanted to remind you of some of the key details we shared. We highlighted that we will be taking the Phoenix strategy to the next level as we look to change the perception of Pandora into a full jewelry brand. Tied to this, Pandora is setting up for accelerating growth ahead. Doing what we've done over the past two years is working, but we are now ready to unleash the potential of the brand and think that we can take this even further. Going after these growth opportunities will mean increased investments. Despite this, we still expect to see EBITDA margin expansion. The business, as ever, will continue to generate a significant amount of free cash flow, with the vast majority of this returned back to our shareholders. These three points I've just mentioned all will translate into mid to high-teens EPS growth into the future. So that's the Pandora business model in a nutshell. Solid growth, high margins, highly cash generative and high earnings growth. Next slide, please. Here you can see how everything I've said translates into numbers with our new three years targets. We're targeting seven to nine percent organic growth, of which four to six will come from like for like with a range of current and new initiatives. This will be complemented with three points of network growth, which is a predictable and highly value-creative revenue stream. For EBIT margins, we will look to balance out investing into the business versus driving operating leverage, but see overall margin expansion, as I mentioned. Specifically, this translates into 26% to 27% EBIT margin by 2026. Finally, given the expected free cash flow generation, we expect to return between 14 and 17 billion Danish kroner of cash back to shareholders over the next three years combined. Next slide, please. Now, this brings me nicely onto how we will be achieving the targets and in particular driving growth. You should all be familiar with this Phoenix wheel by now, with the four strategic pillars that built the foundation of our strategy. At the CMD, we laid out many initiatives across the four pillars. And I will certainly not go through them here one by one, but instead just highlight the breadth of initiatives we have. From restaging the brand early next year to expanding it to new design aesthetics and continuing to drive growth across all our markets. The message is simply that we have a lot of growth opportunities across the strategic pillars. As I said, some of the initiatives are already having a positive impact. So in that point, let's dive deeper into how we drove brand heat in the third quarter. Next slide. So we spoke at great length a few weeks back on how our brand strategy centers on bringing more consumers into the Pandora brand and how we would now become unmissable. Quarter three is a great example of how that comes to life. Our strong like-for-like growth was driven in large parts by various brand activations across the quarter, which in return drove a large increase in traffic into our stores and e-commerce. And as I've always said, once we get the traffic, the rest is far simpler as we're really good at converting. For the quarter, we were present across many big events. Our Diamonds launch campaign in New York was part of New York Fashion Week and saw wide-scale reach. We then were also present across other fashion events in Copenhagen and Paris, to mention a few. It therefore shouldn't come as a huge surprise that these efforts are paying off in such trends. And some of you may have noticed that Pandora was the most searched jewelry brand globally. And of course, we continue to dial up our desirability through engaging our new brand ambassadors. Next slide, please. Alongside all efforts in being unmissable, we had a particularly strong quarter across our social media activations. You can see on the slide some KPIs we have given, but we know how to remain culturally relevant and drive good brand heat. Some of these trends won't be repeatable every quarter, but we have a multifaceted marketing strategy that looks to drive penetration. We will continue to invest into this strategy to drive our brand heat further. Now, good marketing only works when the product itself is resonating with the consumer. That leads me nicely on to the next slide. Our redefined core covers all of charms and carriers. This is our Moments platform and PandoraMe. It's imperative that we continue to develop the designs to stay relevant. I spoke earlier in the year about our new studded chain bracelet which underpins our unique captive business model in moments. This continues to do very well and we've also complemented with other variations such as a gold plated version which is also driving good incremental growth within our bracelets. Our base products in charms also performed very well. We simply have the scale and breadth that no one can match. Overall, this helped to drive 7% like-for-like growth for the Moments platform. Meanwhile, it's also great to see our continued efforts and focus on Pandora ME continue to drive strong results with a plus 12% like-for-like growth. This was helped with a good uptake of our new product offering here. Next slide, please. To fuel with more, we continue to invest in all our other platforms as we truly elevate Pandora into full jewelry brand. You can see that this year the strategy has continued to work. Timeless, which is our second biggest platform, reported a very strong quarter of plus 21% like-for-like growth. This was relatively broad-based, but also boosted by various social media trends in products, such as the Promise Ring. When you have beautiful products and relevant marketing buzz, then the impact can be very powerful, given our reach as the biggest brand in the accessible jewelry market. For diamonds, in late August, you will remember that we launched our expanded assortment. It's very early days, but we have been encouraged by the early signs we have seen since then. The growth in the quarter comes off a low base, but let's speak about that in a bit more detail on the next slide. As you heard a few weeks back, we remain very excited about the future of lab-grown diamonds for Pandora. We believe this has potential to be transformative for the group and have given a new ambition of driving more than a billion DKK of revenues by 2026. The first step in this journey was taken in Q3 where we expanded with three new collections which feature more classical designs while still carrying a Pandora twist. This was accompanied by an exciting new star-studded marketing campaign under the banner of Diamonds for All. The campaign has seen very strong results with our share of voice being particularly strong in the immediate aftermath of the campaign. In terms of our actual performance since the launch, we've seen a doubling of our absolute sellout in the US. This is a small sample size and we have plenty of work ahead, but we remain confident of the opportunity here. As the next step within this month, we'll be launching the collection across Mexico and Brazil. Next slide, please. Before I dive into the specific markets, I just also wanted to touch on the personalization growth pillar. It's clearly our job to ensure world-class in-store experience and complement our products with best-in-class services. In-store and online engraving is a great example of this and we have significantly scaled up our offering here this year with 850 stores offering the service. This is already driving good incremental growth and therefore we remain excited about our rollout plans here with a total of 1,450 Pandora stores offering these services by the end of next year. Next slide, please. Now, let's take a closer look at the specifics of the third quarter. We delivered 11% organic growth with a strong like-for-like of nine. This was a clear acceleration from the trends we saw in Q2. A lot of this is down to the Phoenix initiatives coming together across brand, product, and in-store. Now diving deeper into the performance, we believe we did see some benefit from higher than expected tourist demand over the initial summer period. We clearly don't know if these holiday patterns remain next year. But overall, we are clearly very happy with the progression of our business. It's clear that the brand heat is consistently moving in the right direction and we're executing well. This can also be seen from the continued outperformance of our own and operated stores, which delivered a very strong plus 12% like-for-like growth. As I said last time, we continue to work closely with our partners to help them narrow their performance gap. 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 U.S., which delivered a 5% like-for-like growth, a strong sequential improvement compared to Q2, where it was minus 5. It's great to have a positive growth back in our largest market after last year, where we lapsed the comparatives from the stimulus checks. Like with many markets, the U.S. benefited from our brand initiatives driving increased traffic, whilst performance was also helped by stronger execution with better conversion rates on higher traffic. Performance of the partners improved to be slightly positive in the quarter. However, as I mentioned, there's still a big gap versus our own operated performance. So we keep working on that. As ever, we've got a strong commercial pipeline for the holiday season that's coming up. Next slide. The performance in our key European markets also improved to plus four like for like versus the flat in the prior quarter. The UK continued to remain resilient despite the weak consumer backdrop. Germany continued to build on its already strong momentum to now deliver a whopping 31% like-for-like growth with strong growth across all platforms. Again, numbers like these are not repeatable every quarter, but we believe the brand still has a long way to go in Germany. In Italy, despite the still weak macro, we saw sequential improvement to be broadly flat in like-for-like terms with better brand momentum. And I want to spend an extra second on France, which we saw notable pickup to plus 5% like-for-like. Whilst there was an element of extra tourist traffic here, we have, as you know, been investing for some time here to elevate the brand desirability. This has included new ambassadors and driving stronger media campaigns, and we are clearly starting to see some of those positive elements play out through a higher brand equity. Next slide, please. In China, our performance was a flat like for like. We relaunched the brand earlier in the quarter in the city of Shanghai and have started to see some encouraging signs. You'll remember that Massimo shared some of these with you at the CMD, but just to highlight some data points again. Since the brand relaunch in Shanghai, we've noted a 37% increase in store traffic versus the rest of the country. There's also been positive trends on social media. However, this was offset by weaker traffic elsewhere. As we've said, this will be a journey ahead and we will continue to monitor our performance going forward. In Australia, our performance was somewhat weak at minus eight, which reflects the still weak consumer sentiment and weakness, in particular in the wholesale channel. Finally, in the rest of Pandora, we continued to see strong growth. There was a strong double-digit contribution from many markets where we continued to build out our presence. Growth in Mexico and Spain also continued to remain solid whilst we saw strong double-digit growth across other countries like Turkey, Portugal and Poland, to mention a few. Next slide, please. You heard me earlier explain how network expansion ties into our new financial targets with a targeted contribution of 3% KGR over the next three years. This is low risk and highly predictable revenue stream. In this quarter, the contribution was already four points, reflecting how quickly we see good revenue growth from new stores. We are well on track for our targeted openings this year. You will also see on the slide a reminder of our vision ahead for network growth. There's so much white space opportunity ahead for us. And over the next three years, we'll be opening around 450 stores. This is through a combination of concept stores and shopping shops. Next slide, please. Finally, I know some of you had the chance to see our new Evoke 2.0 store concept in London last month. For those of you that didn't, I just wanted to emphasize that this new store concept is a step change in how consumers will view the Pandora brand and how we execute. It serves two core purposes. The first one being to elevate the brand and secondly to position Pandora as a full jewelry brand. We have ambitious plans to accelerate our rollout here, which you can see on this slide. For this year, we're on track to have our 40 new Evoque stores, so I'm sure you'll keep seeing them pop up near you. So do have a visit for yourself to experience the change. And on that note, I hand it to Anders for a closer look at the numbers.

Thank you, Alexander, and good morning or good afternoon, everyone. And please turn to slide 22. The key message for the quarter clearly was that we delivered a very strong top line. But on top of that, our profitability metrics also remain strong. As usual on this slide, I'll just dig into some of the other KPIs and then get to the revenue and EBIT on the following slides. You already heard Alexander talk about the gross margin, but it's worth for me mentioning it once again, because our gross margin did reach a new record high at 79% in the quarter. And this is a continuation of the journey that we've been on for some years, with a gradual increase in the gross margin. It's driven by strong underlying foundations, and that's why we emphasize at the CMD that the gross margin will remain high going into the future also. You can see in the table that our working capital was broadly flat in the quarter at around 9% of revenue. And within working capital, you will note that inventories were down versus last year, around 300 million kroner in absolute terms, and from around 20% to 18% measured as a percent of revenue. For the full year of 2023, we are well on track to end the year with inventories broadly flat versus last year, and thereby down as a percent of revenue given that Pandora is growing the top line. And this is all in line with what we've said previously. Worth noting is also the improvement in the cash conversion in the quarter to 65% compared to 0% last year. And this difference is mainly reflecting that last year we deliberately built up inventories. And finally, just as a reminder, the increase in leverage to 1.5 turns reflects the higher shareholder distributions, which we decided to pay out in order to move up from the low end of the capital structure policy last year to around the midpoint by the end of this year. And aligned with normal seasonality, our leverage peaks here in the third quarter before falling back in Q4, where we expect to end this year around 1.2 turns. And then please move to the next slide. And here we'll take a closer look at the revenue performance in the quarter. Most of the building blocks in the bridge are probably self-explanatory, so there's just two of them that I want to comment on. First of all, we saw another quarter with solid contribution of four points from network expansion, and this is in line with the guidance for the full year as well. The EBIT margin on this incremental growth in Q3 was north of 30%, and with margins on this network expansion going even further up when we get to the peak here in Q4. Secondly, I wanted to comment on the building block that we call sell out and the minus 2%. And as you probably know that this is an impact we had expected and it already sits in the old guidance. And there's three sources to this headwind. First of all, lower like-for-like performance among our partners leads them to operate with lower inventories. and in some cases probably too low inventories, and this reduces our sell-in. Secondly, we see quite low performance among partners, other points of sale, for example, multi-brand stores. And these types of stores are not included in the like-for-like KPI, and therefore it drags down organic growth only. And finally, there's a number of other smaller factors such as provisions for the loyalty program that we are launching in a number of countries. The comparator from the diamond launched last year in 2022 and reducing business with a partner in Germany. And then please go to the next slide. You may have noticed that we have redesigned this EBIT margin bridge slightly this quarter. This is all in line with what we spoke about at the Capital Market Day and reflects how we think about operating leverage and our investments into growth. On the EBIT margin, our key message is consistent with what we have said all year. profitability remains solid, all our underlying drivers are progressing as planned, and we are on track to deliver around 25% margin for the full year. And as we've said since the start of the year, the EBIT margin in the first three quarters will be below 2022, and then Q4 will be above. And I'll explain the drivers of the Q4 margin uplift shortly when we get to the guidance section. But to put it in a simple way and just to repeat what we said last quarter, then as long as revenue comes in within the guidance, we will deliver on the full year EBIT margin. And with that, then let's move into the guidance update on slide 26. As Alexander already mentioned, we have upgraded our revenue guidance, and here's how we think about it. First of all, we've started the year better than expected. Organic growth year-to-date in 2023 sits at 5%, and thereby at the high end of the old full-year guidance. Secondly, we have seen a clear acceleration in growth in the third quarter, with organic growth landing at 11%. And on top hereof, current trading in Q4 has also started well with underlying like-for-like at high single-digit levels and thereby also clearly above the old guidance. And based on those factors, we have updated the guidance for organic growth to between plus 5 and plus 6 percent versus previously plus 2 to plus 5. And we know from the questions and comments that we have received from you this morning that many of you have already done the math to see that the new guidance implies a like for likes specifically in Q4 of between 2% and 5%. And you may ask why we are guiding with 2% to 5% like for like in Q4 when the third quarter sits at plus 9% and current trading at a high single-digit level. And there's four things here that we want to point out. First of all, as you know, the holiday season is typically more competitive across the board. Secondly, our social media activations were particularly strong over Q3, and this is not a linear progression. Some quarters we will create more buzz than others. It's clearly our strategy to continue to drive this, but you should not think of this as a repeatable aspect every single quarter. And thirdly, I also want to add that the rest of Pandora saw very strong flight growth at 22% in the third quarter, and comparatives there do get tougher as we move forward. And lastly, we remain conscious of the macroeconomic situation, and the macroeconomic backdrop do remain uncertain, and at the low end of the guidance, we assume macro to weaken. And then go to the next slide, please, slide 27. Our EBIT margin guidance remains unchanged at around 25%. The EBIT margin so far this year is in line with our expectation, and we are on track to deliver the 25% margin for the full year. Now, based on the year-to-date performance, you will be able to calculate that the guidance implies that the Q4 margin is up year over year. And in this connection, I just want to highlight a couple of pointers which may help you thinking around that uplift. First of all, we had a 100 basis point drag from the pure facing of costs during the first three quarters of the year. And as you know, this is as expected and it will swing around in Q4 and become a tailwind. Secondly, commodities and foreign exchange will be a 60 basis point tailwind in Q4 compared to last year. And that comes after having been a drag of 70 basis points during the first three quarters of the year. So it's also a quite big sequential shift as well. All of this means that we have good visibility on the drivers to deliver the year-over-year increase in the Q4 margin. Finally, as a reminder of what we said at the Capital Market Day, we will accelerate our investment in order to fuel current and future growth. And you can see that already in play here in 2023. where we have been increasing our Phoenix investments during the year as revenue growth kept going up and operating leverage allowed us to increase investments. Because we want to build on the momentum that we have and invest for the future while still delivering on our EBIT margin commitment, of course. And with that, I'll now hand it back to Alexander and please go to slide 28.