Watches of Switzerland Group PLC (WOSG) Earnings Call Transcript & Summary

Good morning, and welcome to the presentation of the Watches of Switzerland Group First Half Fiscal year '22 results. We communicated sales performance and estimated profits for the half on the 9th of November, and now we're presenting the final results and some further details. I will give the business update, then our CFO, Anders Romberg, will present the financial review and our latest outlook for the full year. We will then open up to your questions. Group sales were GBP 586 million, plus 45% and plus 41% versus last year and 2 years ago, respectively. Business in the U.S. continues to be very strong at plus 50% versus last year and plus 67% versus 2 years ago. In the U.K., sales were also very strong at plus 42% versus last year plus 32% versus 2 years ago. Group e-comm at plus 29% was a positive pleasant surprise given that this year, stores were open, and last year was impacted by lockdown store closures and much reduced traffic. Profits benefited from favorable margin mix and cost leverage. Consequently, adjusted EBITDA at GBP 82.8 million was 59% ahead of last year, adjusted EBIT better last year by 63%. We made good progress towards our long-range plan objectives, both from the strong sales performance and from the announcement of 5 new store acquisitions in the U.S. These pie charts compare this year, last year and 2 years prior and show the changing mix of our business. The top pie chart shows that in fiscal year '20, the client split of sales was 40.5% U.K. domestic, 25.9% U.S. domestic and 33.6% international, which was all in fact, in the U.K. The international sales mix was down to 7.4% in fiscal year '21, and this year, less than 2% as we have successfully pivoted our business to domestic clients. U.K. domestic client sales moved from 40.5% to 63.6% to 69.7% of group sales through these periods. In the second pie chart, we see the changing mix of brand sales. Supply-constrained brands, by that, we mean Rolex, Patek and Audemars were 60.5% of sales in fiscal year '20, increasing to 68.9% in fiscal year '21, as last year, we were -- we continued to transact with waiting less clients during the store disruptions. With stores fully open, brand split returned to more normal levels this year. However, the other luxury watch segment, where we have less limitation on supply enjoyed very strong sales growth in both the U.K. and U.S., an increase to 28.2% of group sales. We continued with our capital program, opening 3 stores in the new Edinburgh St. James development and 3 mono-brand stores in Plymouth. We introduced our new Goldsmith luxury concept in Canterbury and Reading in the half year, and we have now completed the list of store. They look really fantastic. We completed 5 more refurbishments in the first half, including 2 previously Fraser Hart stores. We now have a network of 98 multi-brand stores and 32 mono-brand stores in the U.K. We see here our 3 mono brand stores recently opened in Plymouth. In the U.S., our delayed flagship store in Aventura Mall, Miami, has opened the Rolex room and our first Bulgari mono-brand. The balance of the store opens next week. Our models and e-comm businesses in the U.S. are both performing very well. We are delighted to have announced our acquisition of 5 stores in the U.S. Our Betteridge acquisition closed formally on the 1st of December. In total, we now have 36 stores in the U.S., 22 multi-brand and 14 mono-brand. The combined LTM revenue of the stores acquired is $100 million. The purchase of the 5 stores takes our U.S. presence now to 12 states. In other developments, our planned opening of a multi-brand store in Cincinnati will now be in January. We have completed a thorough rebrand of the vintage watch retail analog shift that we acquired last year, and we have stepped up on the product acquisition. We have also launched our new website. I visited the Wynn Resort recently, and our complete rebuild of the store, which will open before the end of this month, is fantastic. Our new store in Minneapolis, our new store in Dallas, and in the Rocky Mountains and Aspen and Vail and in the charming town of Greenwich, Connecticut. I also visited recently the American Dream project in New Jersey, which will open next summer. Also opening next summer in the U.K. will be a Watches of Switzerland multi-brand store in Battlesea with Rolex and Cartier. We will also open 3 mono-brand stores in what we think will be a great shopping destination for Londoners and tourists. Our digital resources and skills have become even more important to our model as we engage with clients in various ways. Today, in the U.K., more than 40% of sales are through pre-appointments. We introduced new products to clients virtually often with our brand partners. Our luxury concierge team continues to grow and is very successful, both with online sales and store support. E-comm is doing great in both the U.K. and U.S. And of course, CRM and clienteling today is vital. We continue to invest in digital marketing and social media. Campaign impressions in the half year in the U.K. totaled $2.9 billion. In the U.S., our priority of marketing is PR, and we achieved 2.4 billion PR impressions in the half. Our greatest strength is and always will be our fantastic teams who do an amazing job. We really do have the best teams in the business. We are making progress on all matters ESG. We've appointed a Board committee chaired by our Non-Executive Director, Rosa Monckton, MBE. We have recruited a full-time executive to Head our ESG programs. We've joined The FTSE4Good and business in the community and joined the BRC Pledge to net 0 by 2040. The Watches of Switzerland Foundation has been formally registered as a charity, with directors and ambassadors recruited. Following our first Board meeting, we have agreed pledges of more than GBP 1 million to food banks in London, Manchester, Newcastle, Liverpool, Glasgow, Birmingham, Lester, Bristol and Cabot. We have also pledged support for The Prince's Trust, with whom we have worked for many years, the Glasgow Hospice, which we have also supported for some years, and a new partner Crisis, who worked with the homeless in our cities. I will now pass over to our CFO, Anders Romberg.

Thank you, Brian. This presentation is based on a pre-IFRS 16 basis and covers the 26 weeks to the end of October 21. We have had an excellent first half, achieving record sales and profitability. Net sales in constant currency were up by 45% on last year and 41% on LLY. Our U.S. business in constant currency was up by 50% on last year and 67% on LLY. In the U.K., sales were up by 42% from last year and up by 32% on 2 years ago when our tourism and airport business accounted for approximately 1/3 of our sales. The pivotal domestic market over the last 2 years has been fantastic and sales to this clientele has more than doubled. The demand environment for luxury watches and jewelry remain strong, with growth in the period led by significant increase in volumes of non-supply-constrained brands. Luxury watches continued to perform well with net sales being up 41%. Luxury jewelry supported by stores being open and a boost in weddings was up by 55%. Our net margin increased by 130 basis points, primarily reflecting favorable product mix. We leverage our fixed costs with store costs being down 30 basis points as a percent of sales despite having received government support in last year. Our adjusted EBITDA was GBP 82.8 million, up 58.8% from last year, and our adjusted EBITDA margin expanded by 150 basis points to 14.1%. Adjusted EBIT came in at GBP 67.5 million or plus 63% on last year, and our adjusted EPS grew by 73%. Our balance sheet is stronger than ever. During the half year, we progressed our capital program, investing GBP 19.1 million of expansion in our capital. We opened 8 new stores, expanded 3, and refurbished 5 stores. In addition, we acquired 2 stores. On December 1, we closed on the Betteridge acquisition with an additional 3 stores added. Inventory levels increased by GBP 18.9 million versus last year and closed out at GBP 240.8 million. This reflects the buildup of stock levels in Rolex during the second quarter to deliver optimal display capacity, along with deep purchasing of non-supply constrained brands ahead of Christmas trading. We closed the half year with net cash of GBP 30 million, and our headroom at the end of the half was GBP 235.8 million, so well poised for further investments and acquisitions. Our free cash flow was GBP 102.3 million, representing conversion of 123.6%. Last year's working capital was favorably impacted by the timing of inventory payments due to the store closures during the first U.K. lockdown. We continued our investment program and spent GBP 19.9 million of expansionary capital. Last year's spend of GBP 8.6 million was impacted by COVID-19 related delays to certain store projects. All of our KPIs improved during the half year. Our 4-wall EBITDA expanded to 20.5% versus 18.9% last year. Improved product mix being the main driver as well as further leverage on store cost. Adjusted EBITDA, as mentioned before, came in at GBP 82.8 million or plus 58.8% from last year. Adjusted EBIT came in at GBP 67.5 million or plus 62.7% on last year. Our ROCE calculated on an LTM basis improved to 23.1%, up from 17.2% last year. With adjusted EBIT on an LTM basis being up 33.5% compared to average capital employed increasing by 13.9%. And now to our guidance for FY '22, which we upgraded at the time of our Q2 trading update in November. Our guidance assumes no disruption to supply and no extended national lockdowns in our markets, or for that matter, in Switzerland. Net sales is planned to grow between 27% and 33%, excluding any impact of potential future acquisitions. Sales is expected to come in between GBP 1.15 billion and GBP 1.2 billion. Adjusted EBITDA and EBITDA margin is expected to improve by 1% to 1.5% on last year. Our depreciation is planned to come in between GBP 30 million and GBP 32 million. Our underlying tax rate is projected at between 21% and 22.5% as we assumed U.S. federal tax rates to increase from January '22. CapEx is projected to be between GBP 45 million and GBP 50 million for the year, and our net debt pre-any further acquisitions is expected to come in between GBP 10 million and GBP 20 million. Thank you. I will now hand back to Brian for some closing remarks.

So thank you, Anders, and thank you for what was your last presentation and for all the years that we've worked together and what we've achieved. Overall, in summary, we are delighted to be reporting record-breaking first half sales and profits. Our quarter 3, 5 weeks into it, supports our full year guidance for fiscal year '22. We have given our commitment to achieve net 0 by 2040. The Watches of Switzerland Foundation was formally launched, and overall, we feel that we are progressing on our long-range plan targets. So with that, I'll happily pass over to your questions.

[Operator Instructions] We will now take our first question from Anne-Laure Bismuth from HSBC.

Yes. I have 3 questions, please. The first one is regarding your strategy to enter the Continental Europe. Where do you stand regarding that strategy? Is this something that can come soon, or this is something for later given that the focus now is also on the U.S.? The second question is about the guidance for profitability for this year. So you delivered a strong adjusted EBITDA in H1 in playing an adjusted EBITDA margin up 1.5%. So what would prevent you to deliver an adjusted EBITDA in absolute terms in H2 broadly similar to H1? And the third question is about the Bulgari stand-alone store. So can you talk about this opening?

Anne-Laure, Brian here. So our strategy in Continental Europe that we included obviously in a long-range plan, we see opportunity there. We see an opportunity for us to introduce our model, our size, our scale, our focus on technology, marketing and so on that you know well. We view the markets in Europe, and in comparison to the U.K. is underdeveloped. And as we expressed in LRP, it's part of our future plans. While we hired an LRP, as we said that by fiscal year '26, it would be 8% of our total group. And we said that we would start to have business in Europe in our fiscal year '23, not fiscal year '22, so that remains a situation. Obviously, we are active when we did the LRP, we're active now. The 2 main vehicles development and entry into the market in EU would be through acquisition and mono-brand but active in both in terms of discussion and opportunity. So what we expressed in LRP remains our objective, we wouldn't change it at this point. And then I'll take the third one, the Bulgari store delayed. I think it looks fabulous as you hopefully saw in the presentation on the video. It's a great brand, doing very well. I'm delighted to be partnering with them, and the store is off to a great start. Anders, you want to?

Yes. So in terms of our guidance, obviously, we put our profit margin out there to be 1% to 1.5% up on last year. And you're right, this first half obviously came in at 1.5%, so we're sort of at the upper end of that. And this half, as we pointed out, has been sort of impacted by the strong performance that we've seen coming through in our non-supply constrained brands, so we had a favorable product mix in this first half of last year. So we're sort of at the upper end at the moment, and we obviously expect our business to come back in Rolex and Audemars and Patek in the second half to some degree, selling what we received. So it's product mix predominantly.

[Operator Instructions] We will now take our next question from Richard Taylor from Barclays.

Yes. Can you hear me okay?

Yes.

Great. So it was a question about the non-supply constrained brands, especially in the U.S. I think we're well versed on the Rolex stuff and so on. But can you just sort of give us a bit more detail on why you think the opportunity is so great there? And how what you're doing can sort of take market share and grow the market overall? Just remind us of some of the initiatives that you're seeing there and why you think that can grow?

Rich, it's Brian here. So I mean, obviously, we've taken our store design and philosophy of store design into the U.S. which is that we present -- we do big stores. We present our brands correctly. We believe given the appropriate space that's there and have stores that intrigue consumers, first of all, to come in because of the welcoming, they're open and abating, and then intrigue them to look at everything that's there overall. We have an overview that -- and I think you'd find this from the entire industry, that the category overall in the U.S. is underdeveloped. And we think that especially so -- of some of these other major brands like OMEGA, Breitling, TAG Heuer and so on. And that's what we've experienced that the growth in these brands has been exceptionally strong, and add Cartier to that group as well, doing fantastically well. Without any doubt, as you know, the way that we're presenting Rolex today is as the stock in stores for demonstration and exhibition purposes, not for sale. And therefore, particularly at this time of year when people are looking to purchase for gifting purposes, they need to purchase immediately. So clearly, these other brands are in a better supply situation. We continue to chase supply, actually, with all these brands. But overall, we're in a reasonable supply situation in store, and they're enjoying very positive performance in U.S. and the U.K. for similar circumstances.

And just to understand the LRP, where you say 25% to 30% top line in the U.S., would you assume the non-supply constrained brands grow faster than the supply constrained? What are your assumptions there?

It's a good question, Richard. Probably today it is based upon the great performance that we've seen from these brands in the last 6 months. We might have tweaked that a little differently, but at the time when we did the LRP, we weren't assuming any -- if you recall, we said we would hold overall in our product margin. The underlying assumption, therefore, is that the mix would not change significantly. So -- but the last 6 months of reporting, these brands have been exceptionally strong.

[Operator Instructions] We will now take our next question from Louise Singlehurst from Goldman Sachs.

Thank you very much for the details and great to see the ongoing great progress within the watch category and for yourselves. The quick question I had was I wonder if you can just talk to us a bit about the strategy about the mono-brand stores? It's great to see the Bulgari opening. But just one in terms of the plan and the demand from the brands and where your kind of priorities lie within the mono-brand strategy, but also from a margin perspective as well?

Yes. Mono-brands have proven a very good direction to go. But what we would emphasize on it is that it's a means by which we effectively can present these brands correctly. I mean if you look at -- we actually showed the visuals, for example, of what we did in Plymouth where we have 3 brands adjacent, and they are the 3 strongest brands in that marketplace. And you could take the view that it's almost like a multi-brand presentation, albeit that each of the brands got their own front doors and the opportunity to build a really strong environment. So we've really favored the brands that we've mainly developed our mono-brand strategy was have been Breitling, TAG Heuer and OMEGA. And obviously, I appreciate that elevated format of a presentation. Being able to do the brands adjacent in that does give some obvious economics in terms of landlord negotiation sharing back house and sharing management and some other activities, so we get the benefit of the concentration overall. Our expectation in setting up mono-brand was that they would be less productive than difficult multi-brand configuration. And that probably remains true at the top line, but we've been very -- I'm pleased with the progress that we've made with mono-brands in the U.K. We have now started the program in the U.S., that's gone well. The Bulgari one that we have out there, it's the only one store that we have and it's off to a great start, and there'll be more potential there with certainly more so. So I think it's all part of the elevation of the category overall, just naturally demands this elevated presentation overall from these brands. We really are globally very, very strong with strong imagery, and the mono-brand allegedly present that much better.

And just in terms of the customer? I mean, obviously, across luxury and particularly within Hart category, we've seen this very strong consumer environment for volumes and pricing and hearing lots of stories where people are trading up to higher ASPs once they start engaging with sales personnel. Is there anything that you can tell us, has there been any changes in customer behavior, willingness to spend? Obviously, the category is very strong, but just trying to make sure we're not missing anything more recently?

Yes, absolutely. The category is strong, and we're seeing it across the board in watches and in jewelry. We are having a really unprecedented positive experience in jewelry, again, both U.K. and U.S. Within all of the brands, there is an ASP increase. So the followers of OMEGA are buying higher-priced OMEGA overall. So again with Breitling, Cartier, and so on. Our overall mix, as you know, these brands have done exceptionally well, just to repeat myself on that, and there've been a higher mix of a total. So our overall ASP is down because of mix, but within the brands, the ASP is significantly up. So willingness in terms of profile of the consumer, but not really pointing to any significant change in terms of the overall attitude, confidence of our consumer base. It's clearly positive. People are spending more money. We do point to asset valuations being good, whether it's property or stock market that helps the confidence and the fact that the consumers have less opportunity of spending money on travel, hospitality or whatever. So it's been a positive market situation, and we're really encouraged by the response of the industry of either us, as retailers and others or of the brands are really investing behind the positive demand momentum that's there, so very encouraged by the trend, and I think it's got some way to go.

There appears to be no further questions. I'd like to turn the conference back to Mr. Brian Duffy, CEO, for any additional or closing remarks.

Okay. Thanks, Tracy. Thanks, everybody, for joining us. So I hope you find the video that we presented in the format of an interesting. We are just very happy with the results for this half year period. Sales growth, I think, has been very strong. Profit growth even stronger, as Anders outlined, because of mix and leverage, and obviously, cash generation has been very strong as well, cash conversion 123%. And resulting in a record level of return on capital employed of over 23%. Current trading, as we mentioned, we're not going to into detail but we're encouraged. It's sort of an odd comparison, overall, particularly here in the U.K. this time last year. For the Christmas season, we're in lockdown in November, we opened in December and then closed again in around Christmas, so it's a very unusual period to compare against what people are shopping yearly. And as we anticipated overall, and we're very encouraged by what we've achieved so far for the season, and therefore, so far for the quarter. So confirming our guidance, we think the performance at the moment underpins our guidance. Delighted to have closed the Betteridge deal on December 1, and our team in the U.S. did a great job along with our new colleagues in the Betteridge in getting that done. And therefore, we feel we're in very good shape with regards to progressing towards our long-range plan objectives that we set out. And our teams just continue to amaze me every time. Their positivity, that enthusiasm for the job that they do and they deliver the ones that are driving the great performance that we have the pleasure of reporting. So thank you all for joining, and wish everybody obviously complements this season, and thanks for your support.