Pandora A/S Ord

Good morning everyone and welcome to the conference call for Pandora's first quarter 2024 results. I'm Bilal Aziz from the Investor Relations team and I'm joined here by our CEO Alexander Lachik, CFO Anders Boyer and the rest of 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 disclaimer on slide two and turn to slide three. I will now turn over to Alexander.

Thank you, Bilal, and welcome to everyone. Let me start by highlighting some of the key messages for the quarter. First of all, we had a very strong start to the year with 18% organic growth, of which 11 comes from like-for-like growth. Putting this into context, the jewelry markets around us remain rather tepid, so we think this is a great achievement. It's also great to see that our investments into our strategy are consistently paying off. Some of you will remember that our brand strategy centers around changing the perception of Pandora into a full jewelry brand. Our Q1 growth comes broad based across our collections, which is exactly in line with our strategic intent of growing the core while growing even faster in the fuel with more segments. Meanwhile, you would have noticed that our gross margins expanded to a record high and continues to demonstrate the benefits of our vertically integrated business model. We've also flagged that, like last year, we would scale up investment to drive current as well as future growth ideas. This is taking place, but our EBIT margins expanded slightly in the quarter, reflecting the strong growth we saw. And of course, all of these KPIs feeds into our unique asset light model where we continue to demonstrate very high returns whilst maintaining low leverage. So in conclusion, it's been a very good start to the next part of our Phoenix chapter. We've continued to make investments into our business and they yielding good results across the board. Now let's move to slide four, please. Given this strong start to the year, we are raising our organic growth guidance for 2024. This now stands at 8% to 10% and includes like-for-like growth of 4% to 6%, which is exactly in line with the mid-term KGAR target we provided at the Capital Markets Day last year. As always, we've taken a number of factors into account. We've got good momentum, but against this, the macroeconomic backdrop is still highly uncertain, and it's very early in the year. In that context, we believe it will be a great achievement if we deliver on this guidance. We do acknowledge that the low end of the guidance would require a consistent worsening of the macroeconomic environment relative to where it sits today. We will, as usual, continue to update you as we move through the year. We've left EBIT margin guidance unchanged at around 25%. We'll continue to press ahead and invest in current and future growth initiatives whilst maintaining our already high margins. We can see that our investments are generating good returns, so no change here. As usual, I'll give a few quick words on current trading. We've started Q2 well. In the first four weeks, our like-for-like is up high single-digit percentage levels versus the same period last year. This is another good sign as we continue to enjoy strong brand momentum. At this point, it's worthwhile to remind you that we also had a particularly strong trading in the second half of last year. This was partially helped by various social media activations, which we don't necessarily expect to repeat every quarter. And in that regard, as you can see from our guidance, we don't assume a straight line extrapolation of the current growth level for the rest of 24. I've mentioned previously that the underlying like-for-like run rate in the back half of last year was probably closer to healthy mid single digit levels. When you overlay the current macro environment, it's important to keep that in mind. Now, can we move to slide six, please? Here you can see the Phoenix strategy, which we updated last year. The Phoenix wheel has served us very well since 2021 and continues to do so today. As you can see on the slide, we have a lot of growth initiatives across our four pillars. I will speak to some of these in detail in the coming slides, but in Q1 alone, we've started the restaging of our brand, which has had an encouraging response. We have continued to drive growth across many of our diverse markets and pressed ahead on the rollout of our new store concept, Evoke 2.0. The growth pipeline is very exciting, not only for this year, but in many years to come. And we will continue to drive this hard. Let's get into the brand restaging in a bit more detail. On the next slide, please. From our Capital Markets Day last year, some of you may remember the refreshed marketing strategy. This program to restage the Pandora brand started in early 24. The essence of this is to really change the perception of the brand into full jewelry brand. We've always had a wide variety of collections, but that hasn't always been the consumer perception. We're now working on changing that, and the brand restaging is and will be instrumental to this mission. We've launched a restaging with a new campaign under the big idea named Be Love. For those of you who have seen the campaign, I'm sure you will recognize that this is a new and contemporary look and feel of our Pandora brand. We're moving away from specific product-centric marketing in order to drive desirability and affinity to the entire Pandora brand. This is indeed a step change and we have and will continue to invest properly behind this and driving brand heat more generally. You can see on the slide some examples of our new campaign. We have appointed two new global ambassadors, sisters and artists Chloe and Hallie Bailey, and so far it's been great to see the good press coverage we've received. Next slide, please. Brand perceptions takes time to change. That's particularly true for low frequency category like jewelry. But as you can see from the quarter and over the past year, we believe we're firmly on the right track to transform our brand. The mission is simply to bring more consumers into the Pandora brand who are looking for high quality, precious metal jewelry that actually means something to them, and obviously at an accessible price. Once we start to dominate that element of the consumer thinking, the rest comes a bit easier. We can offer them a various range of collections to suit their needs. With that in mind, you can see on the slide how we've continued to drive growth across our collections. Driving the core whilst fuelling with more is exactly in line with our strategy. Which brings me nicely on to the next slide. Let's start with the core. Here, we leverage our strong heritage through our icons while sprinkling on pieces of innovation. We had a solid quarter in Q1 in our core, which grew at 3% like for like. Within this, moments had a good quarter at 5% like for like, with the overall performance weighed down somewhat by collabs, which always goes through various cycles. You can see some of the best-selling products in the quarter on the slide, and we continue to see solid growth in our iconic silver bracelet. This continues to fuel growth in our carriers, which is important. Elsewhere, Pandora Me continues to contribute with yet another very strong quarter. Next slide, please. Here you can see the progress I was referring to on fuel with more. Clearly, this is dominated by very strong numbers from Timeless. As per last year, this growth is relatively broad based against all product categories. And it's important to remember that the collection is resonating with consumers, not only the specific products. Timeless offers beautiful, precious metal, classical jewelry for all occasions. So I'm not particularly surprised that we're attracting more and more consumers into the brand through this. We continue to experience benefits from social media activations. As in previous quarters, it's in particular supporting our timeless collection. In addition to meaningful impact on sales, it's also a testament that our brand resonates well with our consumers. For our lab-grown diamonds, we've continued to make progress here with 87% like-for-like growth. This is helped by the expansion of the assortment we had last year in Q3, which we're still annualizing. We still have a lot to learn and optimize here. We're convinced that we have a big role to play in the lab-grown diamond market, and Panerua is the brand that can democratize this category. One benefit from our presence in lab-grown diamonds is that we've seen a positive halo effect on the brand at large. We can see this clearly in North America from data where the consideration to purchase any piece of Pandora jewelry has increased since we expanded our lab-grown diamond assortment. So there are multiple benefits in being present in this category, and it's clearly elevating our full jewelry brand promise. Now let's discuss some of our markets. Let's start with our biggest market, the U.S., which delivered 9% like-for-like growth, another strong quarter. As we saw in the second half of last year, the U.S. continued to benefit from our brand initiatives driving increased traffic. The brand halo effect has also been most pronounced in the U.S. from introducing lab-grown diamonds. Meanwhile, you will remember that the U.S. remains a big opportunity for network expansion for us, and you can see how that drove overall organic growth at 16% in the quarter. Next slide, please. The performance in our key European markets was also strong at 9% like-for-like. This was driven in large part by Germany with exceptional 67% like-for-like growth. I know you will ask me what road is, as you should. This was relatively broad based across our collections, driven by a brand which is simply increasing penetration in a big jewelry market. Of course, we do expect these trends to moderate, but you should keep in mind that the Pandora formula of increasing brand heat in low penetration markets works really well. Germany is just one example of this. In the UK and Italy, the performance continued to remain resilient despite the weak consumer backgrowth. Finally, in France, we delivered 2% like-for-like growth, where some of our positive brand initiatives were somewhat offset by weakness in the partner channel, with like-for-like in partner stores at minus 12%. This has been a sore point for a while in France, and we do have a plan to address this. Next slide, please. In China, our performance of minus 17% like-for-like was disappointing. Shanghai keeps performing ahead of the country, which demonstrates an effect of our actions. We can record an improved performance in Shanghai with a delta of six points versus the mainland, despite actually reducing the promo pressure. Conversion rate is at a four-year high, and traffic is at plus nine versus a minus 11 for the rest of the country. Moments has a 14-point delta in performance. So what I'm trying to say, slowly, slowly, we're starting to find a better model in China. In Australia, we continue to be impacted by the weak consumer sentiment, which continues to impact the partner channels. A similar trend to what we saw last year. In Q1, we delivered 2% growth in our own physical stores, while like for like was minus 10 in the partner stores. Finally, on rest of Pandora, we delivered 18% like-for-like growth. This was of a tough comparison base, so it's a good performance, and the growth was relatively broad-based, a reminder of the diverse nature of our growth here. However, we remain mindful also here that our comparatives remain tough, and we continue to expect some element of normalization of growth here for the rest of the year. Next slide, please. As usual, I'll provide a quick update on our network plans. We saw strong contribution from network expansion of 5% in the quarter. This is mostly driven by the openings we had last year and it's good to see the sales and earnings accretion coming through nicely. We will continue to push ahead with our store opening plans this year in 2024 with a total current target of 100 to 175 openings. We now expect the organic revenue contribution from network growth to be 4% for this year versus the previous guidance of 3% to 4%. Next slide, please. Finally, before I hand over to Anders, I'll provide a brief update on progress on the new store concept called Evoke 2.0. As a reminder, the Evoke 2.0 is a fundamental redesign of the classic Pandora store with the vision of presenting us as a full jewelry brand and elevating brand desirability. We now have opened a total of 88 Evoke 2.0 stores. The latest openings and refurbs we've had in Q1 have been in the US and Italy as we build out the newer store concept more globally. We continue to see good traction here. We can clearly see that consumers are engaging across our collections much more intuitively, which is perfectly in line with the strategic intent. We will continue to update you here as we move forward, but on the very small sample size of Evoque 2.0 openings, we've seen so far we can indeed see that they're accretive to like-for-like growth at low single-digit levels, in line with our expectations. And on that note, I'll hand it over to Anders for a closer look at the financials.

Thank you, Alexander, and good morning, everyone. And please turn to slide 17. In the first quarter, you can see how our top line growth is feeding down through a high gross margin and then further down in the P&L, driving some operating leverage and all the way down to an 18% growth in earnings per share. And this is indeed a good reflection of how our business model works. Let me just highlight two other KPIs on this slide, and I'll start out with the gross margin, which hit another historical record high at 79.4% in Q1. Without the one-off drag in the quarter, which we have in connection with forward integration, the gross margin would actually have been above 80%. And I would like to repeat that these high gross margin levels are sustainable. We've operated around this level for some time now and there's no positive one-offs that makes the gross margin so high here in Q1. It is just a continuation of our gross margin journey during the last years and a reflection of a strong brand combined with a vertically integrated business model operating at a very large scale. Moving on, you can also see in the table on this slide that our working capital improved a bit from last year, and that was partly driven by good inventory management. And you can see that our inventory decreased around one percentage point of revenue compared to last year. Next slide, please. Now, here we will take a bit deeper look at the revenue performance in the quarter. Alexander has actually already covered the like-for-like and networks. I'll just cover one other element on the slide here, and that's the one called the calendar impact and other. Within the quarter, we saw two percentage points positive organic growth impact from other factors, and this was partly related to a calendar impact due to the fact that it is leap year here in 2024, and that gives an extra trading day in February. This will obviously reverse out in Q1 of next year, so please keep that in mind for your models. I'm also happy to report that in Q1 we did not see a drag on organic growth from the sell-in to our partner channels. That's quite encouraging obviously because we have seen such a drag for the past many quarters. Having said that, the environment still remains uncertain, so let's see how this develops for the rest of the year. Next slide, please. On the EBIT margin, our performance played out a bit better than our expectations. And as you might remember from back in February, we said that we expected our Q1 margins to be a bit lower than last year due to our investments in the restaging of the brand. Now, our marketing expenses were actually up almost 30% in Q1, but as you can see in the bridge here, the strong top-line growth drove 130 basis points of operating leverage and offset the investments. Our EBIT margin in the quarter was temporarily impacted by 90 basis points of headwind from forward integration. And compared to last year, that's a net 80 basis points of headwind. And that's the net of the two building blocks in this bridge showing the forward integration impact last year and this year. But without this one-off impact, the underlying EBIT margin in Q1 was close to 23%. So now let's move on to the guidance update on slide 21. As you have seen today, we started the year well with a strong Q1, and this has prompted us to increase our organic growth guidance to 8-10% from 6-9% previously. Alexander has already given some comments about the guidance, but there's a few things we want to stress or repeat here. We clearly had a strong first quarter, and so far current trading has remained solid in the second quarter. The current trading, of course, covers a quite short period of time, and this can indeed be impacted by many things, but we are happy that our underlying demand looks similar to what we've seen over the past three quarters. But we can't just extrapolate this going forward to the rest of 2024. First of all, as Alexander reminded you already, we had a particularly strong trading in the second half of last year, 2023. And that was partly helped by a number of social media activations, which we do not necessarily expect to be able to repeat every quarter. Secondly, while growth in especially the rest of the Pandora and not least Germany has started off strong in 2024, we do expect some normalization of growth here. And then finally, just repeating again, we are still conscious of the macroeconomic situation and the low end of our guidance accounts for a weakening of the macroeconomic climate relative to today. So in summary, we have started the year well, our growth pipeline remains strong, but it is early on in the year. And obviously we will continue to update you on the guidance as we move through 2024. One final note here is that we have raised our network guidance slightly to around 4% versus 3-4% previously. And that simply reflects some fine tuning on the timing of the openings this year and the ramp up from last year's openings in Q4. Next slide, please. We're keeping our EBIT margin guidance unchanged at around 25%, and we've laid out the building blocks for the margin guidance on this slide, and we're happy to dive into the building blocks if you have more detailed questions. The operating leverage from the higher revenue guidance will be reinvested in growth initiatives to keep fueling the top line both in 2024 and going forward. And this includes, for example, continued investments in the brand, accelerated investments in building out our presence in Asia, including in the big jewelry markets in Japan and South Korea, as well as a bit of accelerated forward integration. I would also like to provide a more of a household comment to the facing of the EBIT margin based on these additional investments that we are making. So while you've seen that the Q1 margins were up year over year, we expect the second quarter and third quarter margins to be slightly lower versus last year and then before being slightly up again in Q4. Next slide, please. Pandora has always been nothing but a wonderful cash generating machine. And we have put in two charts here illustrating that. The upper chart we haven't shown before, but it shows that our payout ratio during the last 11 years, on average we have returned around 100% of our net income to shareholders since 2012. And as you can see in the lower chart, and this is just repeating what we showed last quarter, but we think it's worthwhile repeating, then a decent part of this payout has taken place as share buybacks. And since 2012, we have bought back and cancelled nearly 35% of the share capital. And in 2024, we do continue this journey and pay out 5.5 billion kroner to the shareholders, or just around 6% of the market cap. Next slide, please. In six weeks time, on June 11 and 12, we are hosting an analyst and investor trip at our state-of-the-art crafting and supply facilities in Thailand. And many of you have signed up already, but we do hope that even more can join us to see our vertically integrated business model and how we are crafting jewelry at such a large scale. And please get in touch with Bilal or someone else from the IR team if you have any questions or want to join. And with that, I'll hand it back to Alexander.