Pandora A/S Ord

Good morning, everyone, and welcome to the conference call for Pandora's third call to 2024 result. I'm Bilal Aziz from the Investor Relations team. I'm joined here by CEO Alexander Luczyk, 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, that would be great. Please pay notice to the disclaimer on slide two and turn to slide three, and I will now hand over to Alexander.

Thank you, Bilal, and welcome, everyone. As usual, I'll start by highlighting some of the key takeaways for the quarter. And as you can see, we've delivered another strong quarter. I put that also in the context of a consumer backdrop, which continues to remain quite challenging. But as I've always said to my colleagues, we don't pretend to control the external macro factors, but we do control how we execute on our Phoenix strategy. That means we control how we increasingly appeal to consumers as an accessible full jewelry brand. A brand that has wide appeal across nearly all usage occasions, be it self-purchase or gifting. Our aim is to make sure we are the first brand you think of when you want any beautiful jewelry for daily use. And our numbers show that that's exactly what we're doing. You can see we delivered 7% like-for-like growth in the quarter. The composition of this growth speaks to our full jewelry brand mission. We drove stable growth in our core whilst fueling this with growth in our other collections. On profitability, our gross margin continues to improve, a reflection of the benefits of a fully vertically integrated business model. This also allows us to maintain very high EBIT margins, despite significantly scaling up investments across all elements of the Phoenix strategy. Finally, we continue to demonstrate very high return on capital, and you can see how all the KPIs lead into the end result for our shareholders, double digit EPS growth. That's what we set out to achieve at last year's Capital Markets Day, and that's what we'll continue to strive for. Now, let's move to slide four, please. Given our strong performance year to date, we are lifting our full year organic growth guidance towards the high end of our previous guidance range. This now stands at 11 to 12% versus 9 to 12% previously. This includes like for like growth of 6 to 7%, which we believe would be a great outcome with the current market backdrop. As always, we've taken a number of factors into account for the guidance, where the low end still accounts for the macroeconomic uncertainty. Our EBIT margin guidance we've left unchanged at around 25%. We will deliver this while making ongoing investments into the business. Now, I'll provide a few words on current trading. We've started the quarter pretty well with our like-for-like growth at mid single digit levels in October. This is in line with the underlying run rate of the business over the past four quarters. We flagged last year that in the second half of the year our growth was helped somewhat by higher than usual social media buzz and that we don't expect to repeat it this year. In that light, our Q3 growth and the way we've started Q4 is a good outcome, particularly when you look at it on a two-year stack basis. Let's move to slide six. On this slide, you can see a quick reminder of the key major pillars of the Phoenix strategy. As I mentioned at the start, the Phoenix strategy centers on the core mission of transforming the perception of Pandora into a full jewelry brand, and within that, elevating brand desirability. In that context, since last year, we've been investing properly behind each pillar you see on this slide. And it's clearly working, and you can be assured that we'll continue alongside this strategy going forward. That leads me nicely on to the next slide. Here, we're showing some examples of our marketing efforts, which are driving Pandora forward through the restaging of the brand. Our marketing efforts will be the key unlock in transforming the perception of the brand into a full jewelry brand. The brand restaging essentially aims to achieve this by driving a core message around the brand as opposed to only specific products. On the slide, you can see that the brand restaging continues to have a positive impact across our business. We are indeed driving higher traffic into our stores. That is despite still quite challenging jewelry markets around us. This is partially because our brand KPIs are moving forward, which includes both unaided awareness and consideration. So our extra investments in marketing are yielding very good results. As usual, we've also been active across many PR events through the quarter, such as Paris, Milan and London Fashion Weeks, which continues to drive buzz around the brand. We now go into the important holiday season where you will notice our new holiday campaign after the successful Loves Unboxed campaign last year. Keep an eye out for that. It's live in some markets already now. Next slide, please. This is a slide we've shown for the past few quarters, but it really demonstrates the success we've had so far in the brand restaging and driving growth across our many collections. Now, it's still very early days on this journey and we believe we have a lot more we can do here. However, it's already encouraging to see the results coming through. I'll delve a bit more into the specifics of the collection shortly, but so far the message you should take out is that our core remains healthy and robust, and the new collections are driving strong growth. This ties in exactly what the marketing strategy sets out to do. Next slide, please. So, let's take a closer look at the core, which consists of our Moments platform, Pandora Me, and our collaborations. Our business overall here remained healthy and drove 2% like-for-like growth. Here, we've continued to leverage our strong charms and carrier business, which is the core identity of the brand. We now look forward to the holiday season, where we have an exciting product pipeline. Similar to Q2, our performance in this segment was weighed down somewhat by our performance in collabs. This always goes through various product cycles, but even here we remain optimistic about the future. I'm sure some of you would have seen our new partnership with Netflix, and we've already announced a new collab associated with a popular show, Stranger Things. Finally, Pandora Me had another strong quarter, so it's good to see that it continues to establish itself within the core. Next slide, please. Here we can see the fuel with more and how it shaped up in the quarter. You will remember that our comparatives in this segment were particularly tough from last year. As I mentioned then, this was partially helped by some heightened usual social media buzz, which led some products to go viral and consequently sell out in many markets. This was mostly in the timeless collection. So in that context, like for like growth of 21% in entire fuel with more segment and 18% in timeless speaks for itself. It's also a reminder that our market share across many jewelry segments is still very low outside wristwear. So these are more long-term structural growth opportunities that we're chasing. On the lab-grown diamond collection, that plays an important strategic role, not only as a collection in its own right, but also in driving home the full jewelry brand message. The halo effect I mentioned previously is important. For the quarter, we continue to make progress here with 34% like-for-like growth. This growth did expectedly moderate as we lapped the assortment expansion from last year in August. So this will also be a feature in Q4. However, we did launch our new Micro Fine Diamonds range, which, as the name suggests, is a micro-sized lab-grown diamond across new product designs. Early days, but this has also been well received. Next slide, please. In the previous quarter, I did promise a bit more detail on our performance in Essence. We have now completed the first full quarter since the launch in mid of Q2, and I'm happy to report that the collection is indeed off to a quite good start. In total, Pandora Essence already accounts for around 3% of our business. That's quite a quick ramp up and quicker than our previous collections. Pandora Essence does play into 17% of the jewelry market of fluid and natural, where up until now, we've had limited presence. Tied to that, we believe roughly half of the growth has been incremental, with new consumers coming into the brand for the first time. And that's a great outcome. By market and product category, we see a global and broad consumer interest in this new collection. Next slide, please. Personalization is the fourth pillar of our strategy and yet another area where we're investing behind and seeing good returns. Engraving is a very tangible example of this. This is nice, easy and a creative business for us. We offer in-store and online engraving across many markets now and it's driving solid incremental growth for our consumers due to its popularity. We are well on track to have at least 1,450 stores offering these services by the end of this year and aim to have coverage across nearly all of our major markets by the end of the year. Next slide, please. Just before I cover the markets, I wanted to tie everything back together to the growth algorithm we have. All four Phoenix pillars work together to drive more consumers into the brand and therefore drive like-for-like growth. In this quarter, this was a healthy 7%, but looking at that over a longer timeframe of nearly five years, we've consistently delivered mid-single-digit like-for-like growth. We think that endorses that the four pillars of Phoenix are working well for us. You'll remember that last year we entered the second chapter of Fenix's growth journey, targeting a 4-6% like-for-like growth until 2026 with a range of new initiatives. We are indeed making good progress on the initiatives we announced. I also think it's important to put the 7% growth in the quarter in context of last year's tough comp base. So that's why it's equally important to look at the growth on the two-year stack, which is very strong at 16%. Now, let's look into the markets. As usual, I'll start with our biggest market, the U.S., which delivered 6% like-for-like growth, another strong quarter. And this is especially strong in the context of a U.S. jewelry market that is still challenging. Similar to the previous quarter, we are complementing the like-for-like performance with our network expansion in the U.S., where there is ample white space. So this led to a 14% organic growth in total, which makes the total performance even better in the current backdrop. Next slide, please. The performance in our key European markets is relatively healthy at 4% like for like. This was still driven by Germany with a 42% like for like growth. And this is a slight moderation of a very tough comp base. But I think you'll agree that it's still a very strong performance in its own right. We do expect the moderation to continue in Q4 of this year. But as I've always said, this is a market we continue to see good runway into the mid to long term. In the UK, similar to prior quarter, the jewelry market remains challenged. So in that context, the flat dish performance is still a good outcome for us. In Italy, our business still remains challenged. Whilst our brand metrics are moving in the right direction, we're yet to see this to translate into higher store traffic. We continue to work on and push through our full jewelry brand offering here. Finally, in France, our performance was stable with slightly softer traffic trends as we comped some of last year's high to normal traffic, which was boosted by the TikTok trends, etc. that were spoken about before. Next slide, please. In Resto Pandora, we delivered 14% like-for-like growth. This performance is of a tough comp base, so it's particularly strong in that context. Our growth was helped by an improvement in Mexico relative to the last quarter. Elsewhere, growth was broad-based and generally quite healthy in most markets, including Iberia and Poland. We've consistently flagged that our comparative remained tough here, and that remains the case for the fourth quarter as well. So keep that in mind, please. Next slide. In China, our performance is minus 33% like for like and is disappointing and behind our expectations. The market backdrop is not particularly helpful, but we're also aware of the challenges we are facing as a brand at the moment in the market. And so we are considering the next step of our journey here, but we remain committed to China. Finally, in Australia, our performance did improve a bit to minus two, albeit still in negative territory. Pandora Essence is off to a particularly good start in that market, but our performance was still weighed down somewhat by the partner channel. Next slide, please. For our network plans, we saw another strong contribution from opening new stores of 5% in the quarter. As with the prior 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'll continue to push ahead with our store opening plans this year in 24, with an upgraded target of 175 to 225 openings this year. Accordingly, we now expect total organic revenue contribution from network to around 5% this year versus 4% to 5% previously. Next slide, please. Finally, before I hand over to Anders, I wanted to give a quick word on progress on our new store concept, Evoke. This is another area of ongoing Fenix investment that I mentioned, and yet another area which is important to drive our full jewelry brand vision. Some of you visited our new flagship store in Copenhagen recently. That is somewhat of a unique example, but the same principle holds. We're on a journey to truly elevate the in-store brand experience. And this plays a huge role in the way consumers perceive us. You may ask what does success look like in the new store concept? And there's both a soft and a hard answer. The soft answer is simply the consumer feeling. When you walk into a Pandora Evoke, or in some cases the flagship, you'll be able to feel and connect to a total branded jewelry experience with a touch of desirability. The hard answer is we expect consumers to engage more with the brand and across all of our collections. Over time, that should lead to high like-for-like growth. So overall, we've continued to make quite good progress with our Evoque openings, which now stand at 295. We're tracking well on our ambitious target, I should say, by 2026. And on that note, I'll hand it over to Anders for a closer look at our numbers.

Thank you, Alexander, and good morning, everyone. Please turn to slide 21. Alexander already gave you a quick snapshot of the quarter at the start, but I'd like to stress his message that the third quarter was a good example of how we can compound growth in a difficult environment, deliver solid profitability at the same time, and then see this filter all the way down to drive strong growth in earnings per share. As you can also see here on this slide, our gross margin remains above 80% for the second quarter in a row. And that's despite a 40 bps headwind from commodities and foreign exchange. And obviously this means that the underlying margin drivers are indeed tracking quite well. And this trend of an underlying gross margin improvement has been a multi-year journey and testament to the structural efficiencies that we have been driven, driving out of our crafting facilities in Thailand, combined with lifting our ASPs higher step by step. And obviously channel mix helps a bit, of course, here as well. I would also like to highlight that our working capital improved to around 6% of revenue, as you can see in the table. And a big part of this improvement is linked to inventories, because our inventories in absolute terms are actually flat versus last year, despite the 14% increase in the top line. And this all leads into a quite capital-efficient business and supports the strong return on invested capital that you can also see on the slide here. Next slide, please. Now, a closer look at the revenue performance in the quarter. But Alexander has already covered the like-for-like performance and the network expansions, so I'll just speak a little to the bucket called sell-in and other in the bridge here. The pink element in the bridge was a small negative impact of around one point in the quarter. That was as expected and as already guided last quarter. The minus one point of growth was largely due to just normal phasing between quarters combined with a continued weakness in the multi-brand channel. For the fourth quarter, we expect a similar drag of one point, and this is already reflected in the organic growth guidance, of course. Next slide, please. On the EBIT margin, our performance played out in line with our expectations, and we are well on track for the full year margin of around 25%. We previously said that the margin here in Q3 specifically could be down up to 100 basis points, and as you can see, it ended down 40 basis points. And you should consider this 40 basis point drop as phasing only. As Alexander mentioned, we keep investing behind the Phoenix strategy, keep investing in current and future growth. And let me add a little bit more color to this. Our marketing spend in the quarter was up 11% in absolute terms. And as you can see in our P&L, then marketing spending in percent of revenue is in line with last year. But this indirectly means that all of the leverage we are getting from the network expansion is being reinvested back into marketing. And that is a conscious choice, and the return on the media investments are good, as you can see on the top line, and it's both driving revenue here and now, and at the same time building and strengthening the brand. On sales and distribution costs, you'll see in our P&L an increase to 40% of revenue this quarter, and that's up 250 basis points from last year. The majority of this, around 160 basis points, is simply a direct link to the expansion of our own store network. And it's important to note that this increase in sales and distribution costs associated with the network is more than offset through both a higher gross margin as well as leverage on the two other OPEX lines. So in other words, and this is just to repeat the message that we've said a couple of times, the network expansion is EBIT margin accretive already from year one. The other main components behind the increase in sales and distribution costs in the quarter includes our investments, for example, into engraving, both in the stores and online, investments into the new online platform, which is going live in the first market exactly as we speak, and also investments into our new workforce management system for the stores. And these digital tech investments accounted for around a 60 basis points increase in the OPEX ratio in the quarter. In Q4, you will see a smaller increase in the cost ratio than what we've seen here in the third quarter. And in Q4, the increase in the sales and distribution cost will, to a large extent, just simply reflect the network expansion. Now then, let's move into the guidance update on slide 25. As Alexander mentioned, we have narrowed our organic growth guidance to the high end of our previous guidance to now being 11 to 12%. And that's the green bar that you see in the middle of the slide here. And within this, you'll see that we have narrowed our like-for-like guidance to 6-7% versus 5-7% before. And that's the first grey bar. And I'm sure that most of you have figured out now that this implies at roughly 2-5% like-for-like growth here in Q4. And that is an implied slowdown, you can say, versus the 7% like for like in Q3. And we wanted to give you a few pointers that will help frame our thinking about that. First of all, the low end of the implied guidance at 2% like for like is the same as we said last quarter. And we understand if you think it looks low relative to what we have been delivering so far. However, we are still mindful of the uncertain external environment and the geopolitical uncertainties. Unfortunately, none of these uncertainties have diminished since last quarter. Therefore, the low end still accounts for a potential and sudden weakening of the trading environment relative to today. Secondly, the 5% LFL growth at the high end of the implied Q4 guidance would be a great outcome in our book. Because you remember the last year like for like was 9% in Q4 and it was lifted by an extraordinary level of social media activity. We don't expect that to repeat this year and we have consistently flagged that the underlying run rate of the business is around mid single digit like for like levels. And that's also how we started out with Q4 and therefore it all ties in well to our current expectations and implied guidance for the quarter. Next slide, please. Now, on the EBIT margin, we're keeping that unchanged at around 25%. And you'll notice in the bridge here that the FX and commodity headwind now stands at 50 basis points. And that compares to a drag of 10 basis points initially when we made the guidance at the beginning of the year. So that's an incremental 40 basis points of headwind that we have been able to absorb this year while investing into the business. On a year-to-date basis, the EBIT margin is in line with last year at 19.4%. And then you can calculate that the guidance thereby implies a Q4 margin, which is slightly up versus last year. And this is all in line with what we have been saying throughout the year. Next slide please. Now we need to spend a bit of time looking at the recent surge in silver prices and gold prices and how that impacts our EBIT margin for 2026. The 26-27% EBIT margin target, which you can see here as the second black bar in the bridge, was set at the CMD in October last year, as many of you probably recall. and it was based on an assumption of a silver price of $24 per ounce. And that compares to the price of $33 a couple of days back, which is the assumption behind the slide here. When that increase in the silver price is combined with the latest gold price and foreign exchange rates, it adds up to a headwind to our EBIT margin of 360 basis points. And that's the two pink bars that you can see in the bridge. So now let's talk a little bit about the potential mitigating actions to offset the two pink bars. And the mitigating actions is what we're trying to illustrate with the two gray bars to the right in the bridge. But first of all, let me be clear about how we approach this as a leadership team. When external factors like this change, then you can choose just to accept it and then take down your target. On the other end of the spectrum, you can choose to use this external push, so to speak, as an opportunity to look broad and deep on how you operate your business. And we are taking this latter approach. This will of course take a little time, so we can't give you an answer today on how much we can mitigate, but I'll take you through our thinking as of today. First of all, there's pricing. And as mentioned back in the second quarter, a decent part of our mitigation will be covered by additional pricing. We've just increased prices by an average of 5% here in October. It's still too early to comment on the impact of that, not the least because some of our markets have only been live with the new pricing for around a couple of weeks. So we have to see how this evolves and then we will revert with more detail at the full year announcement. You should also be aware that with the current price of silver we will be taking further pricing action in 2025 over and above the normal 1-2% of price increases that we are doing every year. We also want to reiterate that we will not be compromising our brand promise of being accessible. But equally, when we look at the current price of silver and gold, combined with the fact that our brand is in a much healthier place, then we will continue to use pricing as a tool to help overcome this commodity pressure. In addition to pricing, we have now just started a group-wide cost program. And in order to be able for us to go deep and broad at speed, while at the same time challenging ourselves on how we operate, we have engaged with a consultancy company for the program. It is very early days and we will update you on the potential as we progress with the program. However, we would like you to know that the impact of any additional cost measures is likely to be mostly visible in 2026 onwards, rather than in 2025. While we are taking a hard look at cost, we will not be compromising our growth algorithm, which has served us so well over the past five years. We will continue to press ahead with investments that will drive near-term and long-term like-for-like growth. Having said that, our track record on maintaining solid profitability is good, at least in our own humble opinion, and we take the current cost headwind very seriously. So, as it stands today, we can confirm that we expect to cover at least 140 basis points of the current headwind. And this is in line with what we said back at the second quarter announcement. And that's the first of the light gray bars to the right in this chart. On the potential to mitigate the remaining 220 basis points, that's the last gray bar, it is too early to say. But another way to look at this bridge is that saying that without any further mitigation, then the EBIT margin in 2026 at the midpoint would be just around 24.5%. And the way to calculate that would be the original EBIT margin target of 26 to 27, less just around 200 basis points of net commodity and FX headwind. So that means that at the midpoint the EBIT margin in 2026 would be in line with where we are basically operating now and have been operating in the last couple of years. But again this is without any further mitigating action on top of the 140 basis points that we have already identified. So in a way you could call that a worst case scenario, that we just keep having an EBIT margin just around the 25 or maybe just below the 25% EBIT margin. So let me conclude by saying that it's obviously quite a margin headwind we are facing, but we are addressing it and we are addressing it forcefully. We will revert at the full year announcement with some more details on how much and how fast we can mitigate. And with that long voiceover to the slide here, I'll hand it back to Alexander.