Pandora A/S Ord

Good morning, everyone, and welcome to the conference call for Pandora's Q2 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 limit yourself today to two questions at a time, that would be wonderful. If you could please pay attention to the disclaimer on slide two, and then turn to slide three. I will now turn over to Alexander.

Thank you Bilal and welcome everyone. As usual, I'll start with a quick snapshot of the overall quarter for Q2. I think it's fair to say it's been another quarter of solid performance from Pandora, especially when you consider that we delivered these results in a very challenging external environment. That's not only when it comes to consumer sentiment, but also when it comes to significant volatility in FX, commodity, and headwinds through tariffs. Despite this, we're progressing on our overall mission, making Pandora known as a full jewelry brand. As you know, this is the main focus of our Phoenix strategy. For Q2, we delivered 3% like-for-like growth, which alongside network expansion drives 8% overall organic growth. Once again, you'll see within the numbers that our core is stable and then this is complemented with good growth in fuel with more. Exactly in line with our overall mission. On profitability, I already mentioned the three types of external headwinds we're facing. I say this because they're quite significant now. Despite that, you'll see we're still delivering very strong profitability with gross margins close to 80% and the EBIT margins in the high teens. As I just mentioned, the underlying performance of these metrics is even stronger. That means our core profitability drivers offset a lot of the external headwinds, which I think is a testament to our strong business model. Finally, our return on capital continues to remain very high at 44%, and we continue to drive good EPS growth. That's especially true if you ignore the effect of foreign exchange, which has been moving around a fair bit recently. All in all, quite a good quarter in the context of the background. Now, let's look ahead. Can we move to slide four, please? As always, guiding forward in a world with little visibility and high volatility isn't easy, but let me summarize our thoughts. From a top-line perspective, our guidance is unchanged. We've delivered H1 growth at around 4% like-for-like with organic growth at 7%. Whilst our Q2 numbers were slower than Q1, I want to highlight that we have a strong commercial pipeline for the remainder of the year. This year, some of our initiatives are slightly back-end loaded. You'll remember last year we launched Pandora Essence in the second quarter, and this year we have another exciting product pipeline, which will be live from the end of Q3. We also continue to elve our marketing messages. I'll speak about this a little bit later. But in short, we have many initiatives due to start from September and onwards. Therefore, we reiterate our organic growth guidance of 7-8%, with like-for-like growth of 4-5%. Now, we've had some clarity on tariffs from a cost perspective, but there is still significant uncertainty how this plays out indirectly on the consumer front. Our guidance does not take these factors or general weakening of the macro environment into account. So we remain incredibly vigilant, but currently we haven't seen many effects of this. Finally, that brings me naturally onto current trading in July. The overall like-for-like trading has been around 2%. But there's two important ways to read this. In the first two weeks of July, our performance has been negatively impacted by a weak end-of-season sale this year versus a particularly strong one last year. That's partly down to us as we simply had less surplus stock available this year. This effect also impacted our trading in the second quarter in June. Furthermore, you should also be reminded that we launched Pandora Essence last year towards the end of Q2, so it had full effect globally in Q3-24. This year, as I mentioned, product news is more skewed towards the end of Q3. So overall, we're on track. That's not to say there are not challenges, but it's nothing we can't overcome with our plans. Our EBIT margin guidance I will let Anders comment on in detail a bit later. However, as a summary, the message is that our guidance is unchanged at around 24%. This now accounts for the full impact of the current tariff levels. We believe this will be a fantastic outcome. I'm sure you'll agree with me that any company that is able to maintain margins around the mid-20s, despite significant incremental external headwinds, has a pretty good control of its commercial actions and cost base. Can we now move to slide six, please? I mentioned last time how in times of uncertainty it becomes even more important we remain clear on what we're trying to achieve. Our North Star is the Phoenix strategy. We are changing the perception of Pandora into full jewelry brand. And the pillars you see on the strategy are taking us towards that. Through the quarter, we executed on many initiatives across the four pillars. Importantly, we have a very healthy pipeline of exciting initiatives ahead of us. We think these will attract more consumers to the brand during the rest of the year and next. And you should recall that our runway for like-for-like growth is quite vast. We're only at the beginning of this full jewelry brand journey. That brings me nicely on to the next slide. I've mentioned our overall objective of the Phoenix strategy, namely to transform the perception of Pandora into a full jewelry brand. This slide lays out quite well, some of you may remember we highlighted the initial arguments at the capital markets day in 23. You can see that today we're mainly a big player in wristwear, but that's only 18% of the market. So if we continue to change the perception of Pandora from not only being a wrist player, in the mind of consumers, will increasingly open up the other 82% of the market. The purpose of this slide is just to illustrate the opportunity ahead of us is significant across all product categories in jewelry. That's what makes our growth prospects quite exciting for many years ahead. Now, it's for us to execute on that promise through our marketing and designs, of course. Next slide, please. I mentioned marketing a few times. Let's talk about that now. Probably the most important pillar of our Phoenix strategy. Here, I wanted to highlight what we've been working on and equally highlight what is coming up. As usual, we have a full breadth of tools to drive consistent brand heat. In the quarter, we've used many of our ambassadors to great effect to drive conversation, particularly our presence in lab-grown diamonds. Q2, as always, marks Mother's Day for us and our campaign this year landed quite well with consumers. We saw that both in the metrics of the brand campaign and our performance across Mother's Day. A campaign like this makes the Panorama message very strong. Our brand stands for storytelling that can emotionally move our consumers. You can bet we're going to double down on that as we enter into the holiday season with a campaign that deepens emotional connections through our storytelling. Finally, we're also going to increase our efforts to be even more culturally relevant across markets. Whilst the global campaign will always remain central to the brand, we believe we have an opportunity to strengthen our local relevance through the use of local talent in selected markets. You can see we're already making moves here with the appointment of Anna Lisa, a famous singer in Italy, and Caroline, a prominent fashion blogger in France. You can expect to see more of these engagements in the future. Next slide, please. Alongside strong marketing plans, we're equally excited this year about the creative pipeline we have. This year, our innovation is going to be focused on our core business, namely our charms and carriers. We'll be bringing new and relevant aesthetics while emphasizing the Pandora brand promise of being accessible to the many. Last year we launched Panora Essence in the first half of the year. This year we're skewed towards the second half. In a few weeks you will see launches of our new Mini Charm selection and medallions. Both hold good potential in the jewelry market where we know good consumer appetite sits. In the case of Minis we're also looking to further strengthen our entry price points. We know this is incredibly important in the current environment. So overall, the past two slides should give you comfort for our commercial plans for the remainder of the year. Next slide, please. In the past quarter, I mentioned the launch of our new e-commerce platform. As part of our mission to dial up brand desirability, we've been investing in this for a complete new look. The new platform brings the brand to life through a much more immersive experience. Since showing promising results last fourth quarter, I'm happy to report now that the platform is live across all of our markets. You can see on the slide some of the commercial metrics, even though it's early days in many countries, which have been very encouraging. This includes a low single-digit improvement in revenue per consumer, which is a fantastic achievement. Next slide, please. Let's now look at our two segments, core and fuel with more. As you know, a strategic aim is to be seen as a full jewelry brand, which essentially entails driving steady growth in the core whilst adding high growth in fuel with more. As I mentioned earlier, we're going to be driving more innovation in our core through the introductions of the new Talisman and Minis design. But before that, our core is remaining relatively robust at 1% growth in the quarter. This was supported by good performance in our core labs. You can see how over the past three years we've been able to drive good stable growth sequentially in our core, exactly in line with our plans. Next slide please. Our fuel with more segments continued to grow quicker. We grew at a healthy mid single digit rate in the quarter, still up against a relatively tough comp from the year before. In Q2, our growth here was helped by strong growth in Pandora essence and lab-grown diamonds. Again, our strategy has been to drive faster growth in fuel with more with good sequential growth year after year. And you can see on the slide that it's been working well. So now let's discuss our performance within the markets. Next slide, please. As usual, I'll start with our biggest market, the US, which delivered a very strong 8% like-for-like growth. This performance is particularly impressive in the context of a tough market. Importantly, our brand metrics remain very strong, meaning this is high-quality growth. We've said this before, but this is a market where our runway is quite strong, so we'll continue to push our marketing efforts here. Tied to that, we've launched our first new Pandora pop-up store recently on Times Square. Some of you may have seen some pictures. It's off to a very, very good start. Next slide, please. In Europe, our total like-for-like growth across all markets came in at 1%, helped by strong growth in markets disclosed in what we call rest of Pandora, such as Spain, Poland, Netherlands, and Portugal. This was offset by weakness in the four European markets that we've historically disclosed separately. There's always some variances between countries, but let me talk you through how we see this in a general sense. Then I'm happy to take questions about specific countries. Firstly, I'm sure you'll be aware the macro environment isn't easy in many of these markets. But of course, we like to control what we can. In that regard, we look to further sharpen how we connect with our consumers through telling stories. I already mentioned our upcoming holiday campaign, and in certain markets we also want to connect much more closely to the local culture. And I mentioned earlier, and we're already acting on this. Finally, we'll also dial up our affordability proposition a bit better. The launch of MINIS will help with that. You've also heard me previously speak about rings being a strong enterprise product for the brand and will act tactically here in some cases too. So overall, our European growth comes in at plus one like for like, which is a mix of some countries performing really well and some things we need to work on. We're aware of that and are certainly moving ahead with executing on our plans. Next slide, please. In the rest of Pandora, we delivered another good quarter of 6% like-for-like growth. As I just mentioned, a big chunk of our other European exposure actually sits here, which helps the growth. I just mentioned some of them in the previous slide, but even beyond Europe, we have many markets which are growing strongly, and that includes Canada, which grew at double digits. In Mexico, which is the other large market in the rest of Pandora, we are facing some challenges with respect to the macro and the broader promotional environment And in the light of that, we have probably gone a little bit too hard on our promo detox journey here, which will be corrected in the back half. Next slide, please. Finally, in China, we had a minus 15 like for like growth and performance remains challenging overall. China is only 1% of our overall business, so the impact at the group level is minimal. As you may have read in the company announcement this morning, we are taking the next steps in this market by closing around 100% hundred loss-making stores. This is part of our plan to reset China and significantly improve profitability while keeping a relevant network in the main metropoles. Finally, in Australia, we saw good improvement to 7% like-for-like growth. This was helped by good performance across Mother's Day and some signs of the macro improving. Let's see how that evolves. Next slide, please. Here you can see a familiar slide on how we create value from our network. There's been one technical change here for 2025. You'd have noticed that we're targeting 50 to 75 store openings this year versus 75 to 100 previously. This adjustment is purely related to the high number of closures in China, which I just mentioned, where we're targeting around 100 closures. Those stores do not generate much revenue, so the impact of these actions on organic growth is virtually nothing. So overall, our plan for store openings ex-China are tracking exactly as planned. That means we're firmly on track to deliver around 3% organic growth contribution from store openings this year. As always, you'll see on the top of the slide the economics of the new store openings of Pandora, a fantastic aspect of our business and its highly productive stores. Next slide, please. Finally, before handing over to Anders, I just wanted to highlight that the rollout of our new store concept Evoke is going quite well. We now have a total of 576 concept stores in our new format. I mentioned a new pop-up store in New York on Times Square. Another recent highlight store-wise was the opening of a second flagship store on the Strip in Las Vegas. For those of you who have seen our flagship store in Copenhagen, the idea is very similar. To enhance the look and feel of the brand and present the brand as a full jewelry brand. I'm convinced that the in-store experience we provide consumers is incredibly important in unlocking our growth. So we will continue to invest here and the new store concept overlaid with a couple of flagships are going to be critical for that. 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 go to slide 20. I guess you are all painfully aware that we are facing quite some external headwinds from commodity prices, FX and now also tariffs, just like many other global companies. But these headwinds are of a magnitude where the impact across the KPIs becomes quite important in order to understand what really goes on behind the scene. And in the company announcement, we therefore break out the effect of this in many of our KPIs. If you look at earnings per share, for example, the reported growth in the second quarter is 6%. But if you take out the FX impact, mainly the weaker US dollar, the FX adjusted EPS growth becomes 18. So that's quite a different number and quite a different story. On the gross margin you will see that it was down only 90 basis points in the quarter and I use the word only intentionally because we are faced with around 170 basis points of headwinds from the three external factors that I just mentioned and we have in fact managed to offset a good chunk of that headwind. And these offsets come from our pricing actions and cost efficiencies. And you can also see a bit more about that in the gross margin bridge in the company announcement. And the overall message on gross margin in 2025 still stands. And that is that you should expect the gross margin to be flattest to only slightly down in 2025 versus last year, despite that we are facing 240 basis points of headwind. And I do think that that is a good achievement given this level of headwinds. Next slide, please. On this slide, we break down the revenue growth in the quarter, as usual, and I'll just add a few comments to the like-for-like. Like-for-like growth in the second quarter was three points lower than the 6% that we reported back in Q1. And there's two elements in that sequential development that we just want to highlight. First of all, Easter this year was in the second quarter as opposed to be in Q1 last year. And that had a small positive effect in Q1 of this year of just under one point of growth with a similar negative effect here in the second quarter. And secondly, as Alexander mentioned, we were negatively impacted in the month of June from a smaller end of season sale than what we ran last year. And we simply had less surplus stock. And at the same time, the sale last year was quite strong. And now then some of you will probably say that, well, Anas, based on that, you should see the like-for-like in current trading being back up at a higher level than what we saw in Q2. And you're right. So there's three things to be aware of here when you look at current trading. First of all, when we announced the second quarter numbers last year, we did highlight that July trading in 2024 was particularly strong. So our current trading should be read in that perspective. And secondly, and this is just repeating, the launch of Talisman and Minis sits in late Q3, while the launch of Essence took place from May onwards last year. And finally, as Alexander also mentioned, we continue to evolve our marketing messages and have a strong holiday campaign lined up. Next slide, please. On the EBIT margin, our performance played out exactly in line with expectations and in line with the phasing through this year, which we have already communicated externally. You will also here see that we faced significant headwinds from commodities, FX and tariffs, adding up to 230 basis points in the quarter. And you can see that within the dotted box on the bridge here. And in that regard, 18.2% is quite a solid EBIT margin. In terms of the factors that we are closer to being within our own control, you can see that that added up to a slight positive margin impact in the quarter. And here I'm speaking about the sum of the three purple-pink bars just to the left on the middle called network expansion, net operating leverage and inflation salary increases versus price increases and efficiencies. Next slide, please. And that's slide 24. Now, on the top line guidance, Alexander has already spoken about some of our thinking here, but I'll just add a couple of points in greater detail. Clearly, since we issued the guidance back in February, the macro picture has become more clouded and uncertainty has increased. And especially when you add tariffs into that mix and how consumers may respond to that, that is a big unknown. And our guidance does not include any potential significant impact from worsening macro, just like when we announced the guidance earlier this year. Now, we did see like-for-like in the second quarter and current trading being a bit below than what implicitly sits in the guidance for the second half. And we do indeed see the business delivering a higher like-for-like in the second half of 2025, based on some of what we've already covered, being the phasing of initiative this year. as well as the strong pipeline of commercial initiatives lined up from September onwards, which Alexander spoke about. So on balance, there's no change to our top line guidance. Next slide, please. The EBIT margin guidance is also unchanged. We still expect a margin of around 24% this year. As you can see in the bridge, we will be facing around 280 basis points of external headwinds. And this now also includes the tariffs factored into our guidance for the full year. And offsetting around half of those 280 basis points of headwind will be quite okay. and a testament to our ability to invest in our business, drive leverage and at the same time move ahead with our mitigation plans. Next slide please. Given the many moving parts externally, we wanted to update you on our latest thoughts about the EBIT margin target for 2026, so next year. First, I also here want to highlight that the total external headwinds since we issued the EBIT margin target back at the capital market day in October 23, now totals to a very significant 500 basis points. And that's the sum of the headwinds from commodities, FX and tariffs, as you can see in the bridge here in the dotted box. That is quite some headwind in less than 24 months. As you remember, we updated our CMD target for 2026 to be around 25% margin back in the Q1 announcement in May. And that included the headwinds from commodities and headwinds at that point in time, but we did not include tariffs back then. Now we have added the full effect of tariffs as well as the latest update on FX and commodities. So let me talk you a little bit more about that. Since we updated the target to around 25% back in May, we have seen another 30 basis points of headwind from commodities and FX. But the good news is that we are able to offset this through further pricings, which we have in fact already implemented. And we therefore now confirm 210 basis points of margin uplift from price increases, as you can see just roughly in the middle of this bridge. Given all of these continued increase in external headwinds, we are dialing up our cost efforts even more. We did launch our group-wide cost program that we call Project Silverstone already early this year, and we are now taking another look into further opportunities. At this point in time, we still expect savings equivalent to 50 to 100 basis points of margin uplift next year. And that's captured in the box that we are calling net operating leverage and deficiencies. So overall, if I ignore tariffs for a second, the message is that we can absorb the additional headwind from FX and commodities that we have seen since Q1 and still target an EBIT margin of around 25% for next year. So now bringing tariffs into the equation, that is going to give us an extra headwind of around 450 million kroner next year 2023. That's 120 basis point of headwind, as you can see to the right in the bridge. And by far, the majority of those tariffs are related to Thailand, obviously. It is a bit too early for us to conclude how much of this we can mitigate and how fast. But what we can say is that we are indeed dialing up our cost focus even more and we will be watching out on what happens to consumer prices and consumer behavior due to tariffs. For now, what we want to say is that we will deliver at least 24% margin in 2020. And then we will come back to you in due course with updates. And on that note, I'll hand it back over to Alexander.