Pandora A/S Ord

Good morning, everyone, and welcome to the conference call for Pandora's second quarter 2024 result. I'm Bilal Aziz from the Investor Relations team. I'm joined here by our CEO, Alessandra Latic, CFO, Anders Boyer, and the remaining 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 at a time, that would be great. Please pay notice to the disclaimer on slide two and turn to slide three. I will now hand over to Alessandra.

Thank you Bilal and welcome to sunny Copenhagen all of you. Let me start by highlighting some of the key takeaways for the quarter. First, we had yet another strong quarter. I'm sure it's no surprise to anyone here that the consumer environment remains challenging. And in that context, the quarter speaks volumes of how the Phoenix strategy continues to take us forward. At the core of our strategy is the aim to change the perception of Pandora into a full jewelry brand. And this is already happening. In the quarter, once again, our growth was broad-based across our collections. We are attracting more consumers into the brand, which is the single most important thing for us. On profitability, you would have noticed that our gross margins expanded once again to record high. I know those of you who attended our investor and analyst days in Thailand recently will know the drivers behind this. And for those of you that were unable to attend, I highly advise you to view the slides on our website. You'll also notice that we continue to make significant investments across the entire value chain. This includes, but obviously goes beyond marketing. Despite this, our EBIT margin remains rock solid. As ever, all of these KPIs feed into our unique asset-light model, and we continue to demonstrate very high returns whilst maintaining low leverage. So, in conclusion, quarter two is another proof point that in a tough environment, we are excelling thanks to our strategy. We are taking market share by building a stronger brand. We will stay on this course. Now, let's move to slide four, please. Given our strong start and pipeline of strategic initiatives, we are raising our full-year growth guidance. This now stands at 9-12% organic growth and includes like-for-like growth of 5-7%. We've taken a number of factors into account. We've got good brand momentum, but against this, the macroeconomic backdrop is highly uncertain. The low end of the guidance accounts for this uncertainty and would require the macroeconomic backdrop to get consistently worse relative to today. We'll of course be keeping a close eye on that. Our EBIT margin guidance we've left unchanged at around 25%. We'll continue to press ahead here to invest in growth initiatives whilst maintaining our already high margins. Now, as you know, we typically give a comment on current trading and we do this to give you a feel of the underlying demand trends of our business. And we've clearly started the quarter very, very well. As we have talked about many times before, then you do have to read like for like carefully when you look at short time horizons like the last five to six weeks. because there's always changing in the trading calendar, such as timing of key trading events, like Mother's Day, for instance, how we decide to play in those events, when we launch new collections, etc., etc. So when we look at the business, then the underlying run rate like-for-like growth sits at the mid-single-digit levels. That's a very solid outcome, given, as I'm sure most of you remember, we started to run into tougher comps from June onwards. So in fact, on a two-year stack, like-for-like has therefore actually accelerated during the last two months from where we were in the first half of the year. So just to be clear, Our underlying demand trends remain very healthy at mid-single-digit like-for-like levels. We've started better than that in Q3 in actual terms. The actual like-for-like is currently above mid-single-digit levels, but that is just phasing, as I mentioned. Now, can we move to slide six, please? Before we move on to the more ins and outs of the quarter, I wanted to take a step back and highlight a few things that really drive value at Pandora. Those of you who attended investor and analyst days in Thailand will be familiar with some of this, but I do think it's important to reiterate. One of the questions we often get is what exactly in the Pandora business model is unique? and hard to replicate? And how can you continuously drive a very attractive financial algorithm which boasts industry-leading gross margins and returns? And the answer is that it's all simply a function of the Pandora ecosystem we have built over the decades, which starts with the brand. The Pandora brand is the core reason for the scale we have. The brand is the core reason we can operate a store at a 40% plus EBIT margin on average. As some of you may know, Pandora is the most well-known jewelry brand in the world. That is great and valuable in itself. That in itself is not that easy to copy. But what is even more valuable is the fact that Pandora owns the space of meaningful jewelry in the minds of consumers. And that is incredibly hard to dislodge. You simply cannot replicate that within a few years, maybe even decades. The brand equity has been built up hand in hand with the Moments platform. It takes decades to build jewelry icons. Our icon, the Moments platform, has been built up over 25 years. And that platform icon is the foundation for our brand equity. Last year, our brand drove demand for 107 million pieces of jewelry globally. Think about that, 107 million pieces. We play in the scale game. This level of volume is all a function of our brand. And this is the core of why we have such high margins and store profitability. Next slide, please. Now, around this brand we have been able to build an infrastructure that is hard to replicate. First, we have invested in and built an unmatched global distribution platform. We have a total of around 6,600 points of sales globally. And out of this almost 2,700 are standalone dedicated Pandora concept stores. You could, of course, with time and a lot of money, replicate a store network. But what you cannot just duplicate is the productivity of the stores, the revenue or gross profit per square meter. And this links back to the brand. Next slide, please. Alongside this, the other piece of the puzzle is the crafting and supply side. Some of you recently saw our facilities in real life, and I'm sure you saw firsthand what we built and the complexity of being able to mass produce hand-finished jewelry at the scale we do. Over the years, we've been able to leverage this crafting scale to drive a cost advantage. For those of you familiar with the Pandora case, our gross margins have been high all since the early days. And during the last five years, Pandora has even operated at the high 70s gross margins. And a lot of that is down to the benefits we've driven from crafting and supply. So to conclude, what we have here is a strong ecosystem which starts with the brand. Around this, we built a strong infrastructure with in-house crafting and supply and in-house distribution. We believe this model yields significant benefits compared to subscale competitive sets. And at the same time, it underpins our financial algorithm that I mentioned earlier. Next slide, please. Now, here you will see our equity story. We have made some important updates that reflect the ecosystem that I just referred to. We believe it's important to be sharp about how and why we will continue to create value for our shareholders in the years to come. And this brings me nicely onto the Phoenix strategy, which we have on the next slide. The Phoenix wheel... Next slide, please. There we go. This phoenix wheel serves to drive growth from that ecosystem I just explained. As usual, I'll speak to some of these in detail in the coming slides, but we're making good progress on nearly all of those pillars. Some of them might be moving forward even a bit sooner than what we've said at the CMD last year, but that's all good symptoms of a company which is moving forward with a clear agenda. Now let's get into the brand restaging into a bit more detail. Next slide. There we go. For those of you who might be new to the story, our marketing strategy is centered around the restaging of the Pandora brand. In plain terms, this means we're changing the perception of the brand in the consumer minds towards a full jewelry brand. We've always had a wide variety of collection, but that hasn't always been the consumer perception. And this is now changing. In Q1, with a new campaign under the banner of Be Love, we launched a brand new look and feel for the brand. I'm sure it's caught the eye for most of you. We're moving away from specific product-centric marketing to driving desirability and affinity to the entire Pandora brand. This is a multi-season campaign that we will leverage through the entire year. And I'm happy to report that the restaging is having a positive impact across our business. Our major brand KPIs are moving forward. We've seen strong traffic trends with good customer acquisition, and that's the most important metric I keep looking at. Then as well, our brand desirability metrics are also moving in the right direction. So overall, whilst we're at the early stages of the brand restaging, the signs are good, and we will continue to invest properly behind this. Next slide, please. I already mentioned our growth across all of our collections a few times, but this slide hopefully makes it crystal clear. Our mission is to bring in more consumers that want high quality, precious metal jewelry that means something to them. We then can take them through the entire brand journey across our beautiful collections. So far, so good. You can see on the slide where we've continued to drive growth across our collections with particularly strong growth in the fuel with more segments, exactly in line with our strategic intent. And again, I want to reiterate that I believe we are only at the start of this journey of really stretching the brand. Now let's dive into some of the collections a bit more in detail. Next slide. Let's start with the core. Here, we leverage our strong heritage through our icons while sprinkling on pieces of innovation. As I mentioned when I described our ecosystem, this is what we're known for and this is why you can't replicate our brand equity. Within the core, we had a robust quarter which grew at 1% like for like. Within this, you should be aware that our performance continues to be weighed down by collaborations which goes through specific product cycles. Looking at the moment's platform in isolation, That continues to drive solid and healthy growth of 3% like for like. Meanwhile, growth in Pandora Me continues to be very strong. Next slide, please. On this one, you can see how the fuel would more shaped up in the quarter. The growth continued to be dominated by Timeless. Encouragingly, this is still relatively broad-based. We may have the odd product here and there that sells more due to various social media activations, but it's important to remember that in aggregate, consumers are engaging much more with the collection as a whole, and that's clearly being helped by our brand restaging. I'll touch on our latest and newest collection, Pandora Essence, in the next slide, so I'll quickly cover lab diamonds first. This remains a big strategic bet for us and we can see the big shifts taking place in the market. We've continued to make progress here with 88% like-for-like growth. This is obviously being helped by last year's assortment expansion. So keep in mind that this will annualize during Q3 and growth will naturally moderate. As ever, we continue to learn and drive the business forward. It's important also to emphasize the role the collection is playing in driving our full jewelry brand message to consumers. We can clearly see the halo effect from lab-grown diamond and it's positive to the rest of our collections. That's why we'll continue to push the collection and be active across many PR events. The presence of our global ambassador, Pamela Anderson, at the Met Gala, wearing almost 200 carats of Pandora white and pink lab-grown diamonds being the latest example. Next slide, please. Finally, on the collections, I wanted to speak about our newest and exciting collection, which we've launched during the quarter, Pandora Essence. We announced this at the Capital Markets Day last year, where we said we would be expanding into the aesthetic space of fluid and natural, which constitutes 17% of the total jewelry market. which until now we've had very little presence in. The collection spans across all product categories in rings, necklaces and a great variety of earrings and is overweight plated gold. Now please bear in mind it's still early days since the launch. Q2 only included four to six weeks of trading depending on country, but so far we've seen an encouraging response with the gold and pearl designs resonating very well across all our markets. Overall, the launch has been in line with our expectations that we had post the pilot test we did in Netherlands. Now let's cover some of the markets as well. Let's start with our biggest market, the U.S., which delivered 5% like-for-like growth, a robust quarter in the context of a jewelry market which we believe is still likely in negative territory, and overall remains challenging. Overall, we believe we're still taking market share in the U.S., which is clearly being helped by our positive brand momentum. 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 14% in the quarter. Next slide, please. The performance in our key European market is strong at 10% like-for-like. This was still driven by Germany with a 65% like-for-like growth. As I explained previously, the drivers here remain our brand, which is driving penetration. We do now run into tougher comparative periods, so we expect the growth to moderate but still remain healthy due to the structural factors I've spoken about. The UK jewellery market remains weak, so in that context our stable performance reads quite well and underpins our resilience. In Italy, similarly, the consumer backdrop is challenging and that's impacting our consumers as well. This is one of our most mature markets, so therefore it's natural to be sensitive to the top-down forces a bit more. We are, however, looking to drive growth in our new collections here to build on our consumer base. Finally, in France, our performance was stable as some of our positive brand initiatives were still offset by weakness in the partner channel. As you know, we are working on ways to solve this sore point. Next slide, please. In China, our performance of minus 23 like for like is still disappointing. We are aware, though, that this will be a journey ahead, so we continue to invest into the brand to build our brand equity further. It will require some patience, but we remain persistent. In Australia, the market backdrop was still quite challenging and continued to be impacted by the weak consumer sentiment, which is in particular impacting our partners in Australia. Next slide, please. In the rest of Pandora, we delivered 13% like-for-like growth. Of a tough comparison base, this is a good performance, and the broad-based nature of the growth serves as a good reminder of the many opportunities we have in this segment to continuously grow. We flagged earlier on the year that we expected the growth levels in Turkey and Mexico to moderate somewhat, and that is indeed taking place. You should keep that in mind for the rest of the year as well. Next slide, please. For network plants, we saw another strong contribution from opening new stores of 6% in the quarter. This is still being 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, and we have upgraded the target for 2024 to 150 to 225 openings this year. Tied to that, we now expect the organic revenue contribution from network growth to be 4% to 5% rather than the 4% announced previously. Finally, before I hand over to Anders, some of you would have noticed that we opened our first ever flagship store in Copenhagen during the quarter. This is a nice example of our value-creative network expansion, combined with our strategy of elevating brand desirability. The new flagship store is our biggest store globally to date, with around 500 square meters across two floors. Now, you shouldn't expect us to be having a huge number of these globally, but we will expand into a few selected cities globally as we believe the store experience is critically important in elevating the brand. Evoque 2.0 is our core store concept, which most consumers will view and experience. That itself is a big step forward in elevating the brand. And in that context, we continue to make steady progress with our openings here with now 154 Evoque stores open by the end of Q2. And on that note, I'll hand it over to Anders for a closer look at the financials.

Thank you, Alexander, and good morning to everyone on the call. And please turn to slide 24. So Alexander already mentioned at the start of the call that the second quarter was another good reminder of how our business model drives strong KPIs all the way down through the P&L. As usual on this slide, I'll just highlight a couple of the KPIs. And actually, I can't help but start talking a little bit about the gross margin because it did reach another above 80% in the quarter. And that even includes a 70 basis point drag from forward integration. I'm not going to repeat all about what I said about the gross margin back in June in Thailand at our investor day. But this journey with a higher and higher gross margin has been a testament to the structural efficiencies that we have been able to drive in our crafting and supply facilities, combined with gradually driving our prices up. So there's no one-off behind this record high gross margin. It is simply a reflection of a strong brand and our ecosystem that Alexandra went through just before. Separately here in the table, you can also see that our working capital once again improved relative to last year. And this was mostly held by solid inventory management because our inventory in absolute terms were flat despite the 15% growth in revenue. And it's quite a nice achievement. Finally, I would like to highlight that our leverage remains low at 1.4 times and is following the usual seasonal pattern. On that note, you should remember that leverage will peak in Q3 probably just above 1.5 times before then dropping back in Q4 towards a targeted 1.2 times leverage level by the end of the year. Next slide, please. Now, let's take a closer look at the revenue performance in the quarter. Alexander has already commented on the first bucket in the bridge here. The like for likes all covers the other elements. As you can see on the bridge, we saw a continued positive contribution from network expansion reaching 6% in the second quarter. That's a great progress, of course, and it comes with quite attractive EBIT margins. So we continue to be very excited by the opportunities in this space going forward. We also saw a small one-point impact from the sell-in and other, as we call it. That is pure phasing, pure timing. And in this quarter, it was largely related to the sell-in impact we had to our partners when we launched our new Pandora Essence collection. And I'm sure that some of you would have calculated that in aggregate, this bucket sill has been a tailwind for the first half around 1.5%. And given the still uncertain environment, we do not extrapolate that going forward and still expect that to be around 0% for the full year as it stands. So please keep that in mind for your models in the second half of the year when you think through the organic model. This is of course already reflected in our new organic growth guidance. On the EBIT margin, our performance played out exactly in line with our expectations. You remember that back in the Q1 announcement, I said that the margins could be down up to 100 basis points in this quarter, and we came in 40 basis points down. And that 40 basis point drop in the EBIT margin is basically just the net drag from the forward integration in the quarter. And that's the two building blocks on the slide here that sits outside of the dotted box. And as you can see in the bridge, without this, the EBIT margin would have been flat versus last year. And that flat EBIT margin is despite all the significant investments that we're making across the value chain. And you've noticed that our marketing expenses alone were up 100 basis points of sales in the quarter as we continue to invest in the restaging of the brand. As you can see in the bridge, the margin is held by the positive operating leverage that we saw from both network expansion and like for like. And then that offsets inflation and the investments that we're doing in the business. So now let's move on to the guidance update on slide 28. As Alexander mentioned, we have increased our organic growth guidance to 9 to 12 percent from 8 to 10 percent before. And within this, you will see that we have increased our like-for-like guidance to five to seven, up from four to six previously. And this means that the like-for-like guidance is now actually above the CAGR range of four to six percent that we gave at the Capital Market Day in London in October last year. The organic growth range here in 2024 is obviously also well above the 7% to 9% CAGR target that we set out at the CMD last year. So it is a testament to the strong start that we have had to the second chapter of our Phoenix journey so far. So I just want to give a few pointers on the 5% to 7% like-for-like range. So far, we've delivered 11% like-for-like growth in Q1 and 8% here in Q2. So just around 9% for the first half of 2024. And I'm sure that most of you have calculated that the like-for-like guidance therefore implies a low to mid single-digit like-for-like in the second half of the year. And let's call that 2% to 5% like-for-like. The low end of that implied growth of around 2% does indeed look low relative to what we have been delivering. However, we want to once again just stress and highlight that the uncertain external environment we are operating in right now, and therefore the low end accounts for a potential weakening of the macroeconomic backdrop relative to where we are now. We believe that the high end of the implied growth, around 5% like-for-like in the second half, would be quite a fantastic outcome in this environment. As Alexander mentioned, our brand remains in very good shape. We continue to push ahead with our strategic initiatives, and we have started the third quarter well with our underlying like-for-like trends remaining at mid-single-digit levels. However, you remember that nearly 40% of our revenue comes in Q4, so there remains a lot of hard work ahead. Another way to think about the second half of the year is to think about what it looks like on a two-year stacked basis. The implied like-for-like growth on a two-year basis would be around 11% to 14% in the second half of the year. And that compares to the 10% that we have delivered in the first half. So the implicit guidance is that the two-year stack will be up to around four percentage points of acceleration on a two-year stack. So again, we believe that this will be quite a great outcome for the year. So overall, we've had a great first half. We started the second half in very good shape as well. That's a reflection of the good brand momentum. But against this, the macro environment remains challenging. And so overall, we believe the guidance strikes the right balance between those factors. Then please go to the margin guidance on slide 29. On the EBIT margin, we are keeping it unchanged at around 25%. And again, the message is pretty consistent from our side. We continue to invest in growth while maintaining our very solid EBIT margin. If you compare this bridge on the slide here with last quarter, you will see that the higher revenue growth is driving a bit more operating leverage. But this is then offset by 50 basis points of more headwind on commodities and FX. And that's mainly FX driven. My message from Q1 on the phasing of the margins through the year still holds as well. So we do expect the third quarter margin to be down slightly versus last year. And then the Q4 margin will be up. And finally, I just want to circle back to a topic we have discussed with many of you during the last couple of months, and that's the impact of the higher silver prices on our long-term margin target for 2026, which we communicated at the CMD last year. And as you probably know, the target is an EBIT margin of 26% to 27% in 2026. And as I'm sure you're aware, the silver price has increased to around $27 per ounce as of now, which is almost a $4 increase since we announced our targets last year. When that's combined with the latest gold prices and foreign exchange rates, it represents a 140 basis points headwind to our EBIT margin target in 2026. So 140 basis points of headwind is not insignificant, and we've spent quite some time looking into actions to offset that headwind. And we're happy to confirm that thanks to, among others, pricing and a number of cost initiatives, we can confirm the EBIT margin target of 26% to 27% in 2026. And of course, silver price volatility is not uncommon, so we'll continue to monitor this as always and look into further actions if need be. And with that, I'll hand it back to Alexander.